FICO Research on Consumer Credit Behavior

In late 2011 FICO, the company behind the ubiquitous FICO credit score, conducted research on score trends from October 2006 to April 2011 using a random sample of 10 million U.S. consumers with credit reports.  I have discussed this research in previous blogs and FICO has conducted more research to provide answers to the following questions:

How much has consumer credit behavior changed over these years of economic stress?

Do shifting levels of delinquencies reflect changing behavior?

How much impact is mortgage pressure having on bad credit behavior?

What can we learn by looking at the characteristics of consumers whose risk scores have changed?

FICO identified four behavior segments that represented 51% of the sample population: Fallen Angels, Rising Stars, Prime Holders, and Moderate and Subprime Holders. The numbers in each segment were based on a population of 200 million, who have credit reports.

Fallen Angels

Fallen Angels are consumers whose scores dropped more than 150 points.  This segment represents 4.3 million of those with credit reports or 2.15 percent. This is the next to the smallest of the four segments. Their credit declined and did not improve. For 72 percent of this segment, mortgage issues weren’t the cause of their problems. In fact, 40 percent had no mortgage. Of the 60 percent with mortgages, 53 percent hadn’t defaulted. The 34 percent with defaulted mortgages were strategic defaulters; in other words, they defaulted only on mortgages and paid their other credit obligations.

Rising Stars

Rising Stars are those whose scores rose more than 100 points. This segment represents 3 million of those with credit reports or 1.5 percent, which is the smallest segment.  Approximately 45 percent have mortgages.  Even though their scores improved, they took on more debt between May 2009 and April 2011 as follows:

22.7 percent opened new auto loans.

33.6 percent opened new credit card accounts.

39.4 percent opened new installment loans.

64.8 percent opened at least one type of credit account.

Prime Holders

Prime Holders are consumers whose scores remained in the low-risk ranges of above 700. This segment represents 67 million or 33.5 percent, which is the largest segment.  Over half (52 percent) have a mortgage.  This segment has been able to maintain stable credit.

Moderate and Subprime Holders

Moderate and Subprime Holders are those whose scores stayed in the medium risk and high risk ranges of under 700.  This segment represents 28.6 million with credit reports or 14.3 percent. They struggle with credit and haven’t improved their credit.  For 86 percent of this segment, mortgage wasn’t the cause of their problems. Approximately 39 percent have mortgages and 63.8 percent of them haven’t defaulted, but have had problems paying other debt. Only 6 percent of those that defaulted on mortgages were strategic defaulters.

The segments with the most change were the Fallen Angels and the Rising Stars, which represent only 3.65 percent or 7.3 million consumers with credit reports.  The Fallen Angels struggled the most to pay mortgages and other debt, which was indicated by the 150 point drop in scores. Overall, approximately three million substantially improved their creditworthiness and less than 50 percent of them had mortgages.

Key Findings

FICO’s key findings comparing consumer risk up to and during the economic downturn are as follows:

Consumer risk score distributions, at a national level, have remained relatively stable during this period of economic difficulty.

Recent improvements in credit card delinquency were driven less by changes in consumer behavior and more by changes in credit policies, such as decreasing card credit limits, closing credit card accounts and approving fewer new accounts.

Lower spending is the most striking overall change in consumer behavior.

Mortgage payments impacted severe delinquencies less than expected.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Getting Credit, Improving Credit, Money & Identity

This post was written by John Ulzheimer