Credit Risk

Spot Default Risk Early – Before it Impacts Your Portfolio

Spot Default Risk Early – Before it Impacts Your Portfolio

April 24, 2023 | Katherine Doe

Even with rising interest rates and economic uncertainty, consumers are still expected to seek out new unsecured loans and lines of credit in the coming year. That’s good for lenders. But lenders need to be aware of a type of risk that has been creeping up. Namely, the risk of borrowers missing a payment early in the lifecycle and defaulting. 

In fact, the percent of unsecured loans and lines of credit that are 60 days or more delinquent has been increasing since late 2021. This can be seen most acutely across credit card and consumer finance loans.(1)

A lender might ask, how did so many of those loans get approved in the first place? 

According to traditional risk models, the consumers may have had an acceptable risk profile when they applied for the unsecured loan and were thus approved. But, they may have experienced big shifts in their finances around the time of application that might not have been captured by traditional risk models – there could be numerous reasons why an individual was initially approved, but then almost immediately became delinquent. 

Perhaps rising inflation and interest rates affected the borrower’s daily budget. Maybe the borrower depleted savings that were accrued from pandemic accommodations. Or maybe other loans – like mortgage or auto – were prioritized over unsecured debts. It could be any combination of these or something else entirely.

Traditional risk models may not be able to recognize this type of early delinquency risk. This is a concern for lenders that offer unsecured loans or lines of credit, as missing a payment soon after opening a new unsecured account may be the first sign of trouble for a consumer that otherwise has an acceptable risk profile.

“Equifax research shows that once a consumer misses a payment early in the loan lifecycle, it is less likely that they will get back on track,” according to Tom Aliff, head of Risk Analytics at Equifax. “A subsequent default can cost a lender a significant sum of money, just months after the new credit account was approved.”

Combat early delinquency risk with a tailored attributes package 

As consumer finances continue to remain tight, lenders can take advantage of a collection of consumer credit attributes that are specifically selected to help better predict delinquency risk early in the lifecycle of an unsecured lending product. 

The Early Payment Default attributes package, part of a new Market-Driven Attributes portfolio from Equifax, can help lenders better differentiate unsecured lending applications that are more likely to become 60+ days past due within the next six months. Lenders can use this package for score overlays, decisioning criteria, and models at the point of acquisition. This allows lenders to approve more customers without taking on more risk. Depending on a lender’s business objectives, some applicants may still be automatically approved but with stricter terms. Some will be flagged for manual review, and others may be denied. 

The attributes can also be used to enhance segmentation for Prescreen campaigns. That way lenders can proactively incorporate early payment delinquency risk as they develop target audiences for their unsecured lending offers.  

What’s unique about this package is that it allows lenders to more easily and quickly leverage nearly 200 credit attributes that are highly effective at predicting risk of delinquency for new unsecured tradelines. The package also includes dozens of brand new attributes never available before. Plus, it contains many attributes that are not typically included in traditional risk models.

For example, the attributes in this package can identify credit behaviors that may be a sign of early delinquency risk, such as: 

  • Higher number of unsecured tradelines

  • Shorter time to delinquency

  • Lower borrowing capacity

Early Payment Default attributes can enhance lenders’ understanding of consumer credit risk and improve their risk segmentation capabilities. When used in models to predict the likelihood of a new unsecured tradeline becoming 60+ days past due, attributes in this package can significantly boost model performance – over 10% increase in models’ predictive power in the sub-prime segment and over 15% increase in models’ predictive power in the near-prime segment.(2) 

Consumer wallets have been significantly impacted by inflation, interest rates, depleted savings, and more – and this will not change anytime soon. In fact, wallets may become even thinner as student loan accommodations expire, even if some amount is forgiven. With this carefully tailored set of attributes focused on early payment default, lenders can better address consumers’ credit risk and how it might impact consumers’ ability to meet financial obligations for new unsecured lending accounts. 

For more details about how to leverage key consumer attributes packages, including:

  • Early payment default 

  • Inflation & rising interest rates

  • Student loan deferments 

  • Ability to pay

  • Accommodation

Contact your Equifax representative or contact us here. Plus, learn additional insights to help your business plan for uncertain economic conditions.

  1. Equifax Credit Trends

  2. Equifax analytics

Katherine Doe

Katherine Doe

Director of Product Marketing, Risk Solutions

Katherine joined Equifax in 2016 and has worked in several marketing roles across our Workforce Solutions and US Information Solutions divisions. When not working on product marketing by day, Katherine enjoys beach days, visting new restaurants, and leisurely South of Broad walks with her dogs in Charleston, SC.