TransUnion: Consumer Risk Conditions Improve as Demand for Credit Rises

CHICAGO, IL – TransUnion’s proprietary Credit Risk Index (CRI) declined for the third consecutive quarter indicating that U.S. consumers are less of a credit risk than in previous quarters. The CRI for the U.S. decreased 0.9 percent in the third quarter of 2010 and now stands at 126.79. At a national level, the CRI dropped 87 basis points (from 127.66), pushing down to a risk level not witnessed in the U.S. since the first quarter of 2009.

“The continued decline in the Credit Risk Index is driven by fewer borrowers delinquent on one or more accounts and lower outstanding debt levels. The gradual decline in the Credit Risk Index, coupled with a 6.5 percent quarterly increase in the demand for credit, as reflected in TransUnion’s 90-day Total Inquiry Index (TII), suggests that consumer credit activity will be stronger in terms of quality and volume,” said Chet Wiermanski, global chief scientist at TransUnion.

The TII is the latest addition to TransUnion’s arsenal of credit benchmarking and monitoring measures. Benchmarked to credit inquiry levels generated by consumers seeking credit in 2000, TransUnion’s TII allows lenders to identify pockets within the U.S. where consumer credit and general economic activity have begun to advance at a faster pace than other areas. The three states showing the greatest quarterly increase in credit demand as measured by the TII were Maryland, Massachusetts, and Minnesota.

On a year-over-year basis, the CRI now stands 1.9 percent lower than it did at the end of the third quarter of 2009. At the end of the third quarter of 2010, 43 states and the District of Columbia experienced declines in their respective credit risk indices, signaling that a broad improvement in consumer credit conditions is finally taking root. Only Maine, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota and Vermont experienced increases in their credit risk indices. It is important to note that only two of these states (North Carolina and New Mexico) have a CRI above the national average.

“Based upon the three quarter decrease within the Credit Risk Index, along with other underlying credit condition shifts reported within TransUnion’s Trend Data repository of anonymous credit information, it is evident that the fundamental improvements consumers have made toward managing their credit is in part giving lenders confidence to restore their credit marketing efforts,” added Wiermanski.

On a state basis, the order of states with the highest Credit Risk Index remained the same with Nevada (163.85) slightly ahead of Mississippi (162.41) and Texas (159.88). Consistent with previous quarters, the least risky states are concentrated in the Upper Midwest, with North Dakota coming in at 80.81 and Minnesota at 89.54.

Paradoxically, the mean average credit score for the U.S. decreased slightly for the second consecutive quarter, indicating greater potential risk at the individual level. “Although tracking the average credit risk score might seem to be a convenient and easy approach to understanding the general direction of consumer credit markets, a change in the average credit score is misleading, which is what occurred during the second and third quarters of 2010,” said Wiermanski. “This is why TransUnion developed the Credit Risk Index, which is a stronger and more reliable leading indicator of consumer credit risk than an average credit score.”

Analysis

“We are optimistic that, short term, the Credit Risk Index will continue to experience small declines as consumer delinquency rates continue to decrease in response to improvements in the employment picture, and as consumers continue to focus on living within their current means,” concluded Wiermanski. “Consumers have made great strides in reducing and effectively managing their debt burden, which is encouraging. However, as we move into the traditional holiday shopping season it will be interesting to see if this fundamental paradigm shift in consumer behavior represents a long term pattern or one that fades as the economy continues to slowly improve.”

TransUnion’s Trend Data Database
The source of the underlying data used for this analysis is TransUnion’s Trend Data, a one-of-a-kind database consisting of 27 million anonymous consumer records randomly sampled every quarter from TransUnion’s national consumer credit database. Each record contains more than 200 credit variables that illustrate consumer credit usage and performance. Since 1992, TransUnion has been aggregating this information at the county, Metropolitan Statistical Area (MSA), state and national levels. www.transunion.com/trenddata

About TransUnion
As a global leader in credit and information management, TransUnion creates advantages for millions of people around the world by gathering, analyzing and delivering information. For businesses, TransUnion helps improve efficiency, manage risk, reduce costs and increase revenue by delivering comprehensive data and advanced analytics and decisioning. For consumers, TransUnion provides the tools, resources and education to help manage their credit health and achieve their financial goals. Through these and other efforts, TransUnion is working to build stronger economies worldwide. Founded in 1968 and headquartered in Chicago, TransUnion employs associates in more than 25 countries on five continents. www.transunion.com/business