Why are clients’ credit scores dropping?

During the pandemic, with many activities and travel plans put on hold, consumers utilized their savings, along with additional relief funds from the government, to pay off their credit balances. This led to decreased balances, making it easier for consumers to stay up to date with their payments and resulting in lower delinquency rates. Consequently, credit scores improved, granting individuals greater access to credit.

Median credit scores experienced a significant surge during the pandemic and have remained elevated since then. However, as government assistance programs came to an end and inflation started to rise in mid-2021, consumer demand for credit increased. Products such as credit cards and personal loans, which offer immediate liquidity, saw particularly high demand. Lenders also became more willing to provide these credit products, leading to a 58.8% increase in credit card originations and a 54.3% increase in unsecured personal loan originations in 2022 compared to the previous year.

The study also highlighted a concerning trend among borrowers who had recently transitioned to a higher credit risk range. Many of these borrowers began reverting to their previous credit behaviors, resulting in delinquency rates similar to those with lower credit scores prior to the pandemic. For instance, the delinquency rate of a sub-segment of new unsecured personal loan borrowers in Q3 2021, who had recently migrated to a higher credit score, resembled the delinquency rates of borrowers with credit scores 25 points lower before the pandemic.

Michele Raneri, the vice president and head of US research and consulting at TransUnion, emphasized the importance of lenders taking a comprehensive approach to assessing credit score migrators. By analyzing additional trended credit behaviors, lenders can better identify borrowers who are likely to maintain their improved credit positions and those who may perform more in line with their prior score levels.

Raneri stated: “Credit scores continue to perform extremely well at their intended role of rank ordering borrower risk. That said, the temporary benefits brought on by pandemic-era government relief programs, and resulting consumer credit behaviors during that time, led to a rise in scores for many consumers, particularly those who previously had lower scores due to delinquent accounts and/or high credit utilization.”