Consumer Credit Balances Shifting to Lower Quality Brackets

Outstanding credit balances classified as subprime or deep subprime have grown by more than 33 percent since the third quarter of 2008, according to a study released this week by Experian.

Further, the number of consumers in the highest grade, superprime, has declined by 10 percent since Q3 2008.

Analysis of data collected in a study was revealed this week in two separate reports released by Experian and Oliver Wyman, an international management consulting firm. The reports show that the shift to lower scores can be traced directly to massive reductions in credit lines by banks and card issuers.

Over the last 12 months, bankcard credit lines have been pared from $3.8 trillion to $3.1 trillion, a 17 percent decline. In the second quarter alone, total credit card debt outstanding contracted at an annual rate of 8.2 percent, according to the Federal Reserve (“Consumer Credit Outstanding Continued Nosedive in June,” Aug. 10).

The Fed is set to release consumer credit information for July next week, with analysts expecting further drops in total credit outstanding.

When credit lines are cut, consumers’ credit scores can be negatively impacted due to credit scoring formulas using a total debt to available credit ratio as a major component.

The Experian–Oliver Wyman reports point to reduction of credit lines as a main culprit, since prime loans actually increased over the study’s period.

“Our analysis…indicated that while loan originations increased by 38 percent from Q4 2008 to Q1 2009, driven primarily by a mortgage refinancing wave, the increase was limited to the most creditworthy consumers,” said Charles Chung, Experian’s senior vice president and general manager of Decision Sciences. “In fact, originations actually declined for subprime and deep subprime consumers, a reflection of lenders’ continued reduced appetite for credit risk.”

Looking at the economic climate as a whole, several loan products experienced a leveling off of early- and mid-stage delinquency rates in Q2 2009. The reports noted that it seems to be a seasonal trend, driven by tax refunds in April and May. Experian cautioned that roll rates to late-stage delinquencies and charge-offs continue to be high.