Inflation is having a broad impact on U.S. households. In the latest Market Pulse podcast, Jeff Richardson, SVP of Marketing at VantageScore®, discussed how delinquencies are rising across credit segments and have even spiked to their highest level in nearly four years. 

“It’s a challenging time for consumers, especially those on the lower income scale,” Richardson said. “Inflation isn’t just a statistic; it’s a daily reality affecting how people manage their finances.”

He said continued pressure on certain consumer groups is fueling the delinquencies.

“The lower scoring consumers, lower income consumers and younger borrowers are more impacted by things like inflation and high rates,” he said. “Overall, the economy is doing well, but for some, it's increasingly hard to meet their payment obligations. And that's why we're seeing the steady rise.”

The Rise in Delinquencies – A Troubling Indicator

One of the episode’s key focus areas is the noticeable increase in delinquencies across credit segments. “Overall delinquencies have been rising. It’s been a slow and steady rise,” Richardson observed, stressing that this trend cuts across various loan products and demographic groups. He attributes this phenomenon to the ongoing economic pressure exerted by inflation, particularly on vulnerable consumer segments.

Will this steady rise in delinquencies continue, and for how long? Richardson said he believes this trend will continue for a bit longer.

“The economy is humming. And as a result, we probably won't see the Federal Reserve lower interest rates to a significant degree, which means it's going to be very hard to manage debt and service debt. It's going to cost a lot for loans. People's money will not go as far as they want it to go. And inflation has not been curtailed,” he said.

A Credit Tier Shift: Reflecting Economic Polarization

The February CreditGauge ™, a monthly analysis by VantageScore, reported that the VantageScore prime credit tier contracted 1.1% year over year. Richardson described this as a “tale of two cities.” 

“We’re seeing a higher volume of super prime borrowers and a higher volume of subprime borrowers. It’s a subtle yet significant bifurcation reflective of the broader economic disparity,” he said.

“If you have a good income, you're invested in the stock markets, and you own a home, you're doing quite well. If you're on the opposite side of that spectrum, as I mentioned, getting gas, paying rent remains to be very expensive,” Richardson explained.

The State of Credit Scores

Responding to audience questions from the January Market Pulse webinar, Richardson tackled the issue of credit scores in the context of the 2022 economic stimulus. “I wouldn’t call them bloated or inflated,” he asserted. “The VantageScore models continue to rank vantage order effectively, which means they are still a reliable measure of consumer risk.”

“What did change was the default rate that any given score represents,” said Richardson.

“So that's a dynamic nature of credit scores. When the economy struggles or is volatile, a 660 might represent a much higher risk than it would when the credit markets are calm and healthy. And we did see some volatility,” he explained.

Tools and Strategies for Future Credit Decisioning

Looking ahead to credit decisioning in 2024, Richardson advised organizations on the necessary tools and strategies. “Organizations should continue to benchmark against best-in-class models,” he suggested, emphasizing the importance of adapting to the dynamic nature of the credit market.

Embracing AI and Advanced Analytics

The episode also explored the potential role of AI in credit decisioning. Richardson cautioned, “While AI offers exciting possibilities, the credit industry must navigate the complexities of full AI integration, mindful of regulatory concerns like the FICO and fair lending laws.”

The Future of Credit Scoring

Richardson gave a glimpse into the future of credit scoring, emphasizing the evolving nature of these models. “What has changed for sure is the default rate that any given score represents,” he explained. “Risk managers need to pay close attention to this dynamic nature of a score to risk relationship.”

More Insights from Market Pulse

Be sure to check out the Market Pulse podcast series for insights on the economy, risk management, credit and financial stresses, the auto industry and more. It’s available on your favorite podcast app and YouTube. You can also register for upcoming Market Pulse webinars.