Credit risk mark drops near 10-year low

The deleveraged, post-recession American consumer may start looking like a refreshed market for consumer and mortgage lenders. TransUnion reports that its Credit Risk Index fell to its lowest level since 2005 at the end of 2013.

TransUnion says that the Index fell to 110.1 at yearend, down almost 9% from the year before.

The company said the improvement resulted from multiple factors. Among these: consumers handling credit more responsibly and fewer subprime and near-prime consumers opening new credit accounts.

For comparison’s sake, the company’s measure peaked at 129.67 at the end of 2009, 15% higher than the current mark. A value of more than 100 represents a higher level of risk, but the current number represents substantial improvement over the peak, TransUnion said. During the Great Recession, the index ranged between 120 and 130, for the most part.

States showing the greatest improvement, under the Consumer Risk Index, were among those that had been walloped the worst in the housing crisis:

• Best improvements. California’s index fell by -12.97%, to 100.74 at yearend.  Nevada’s fell by -12.94% to 130.85. Florida’s fell by -12.17% to 140.35. And Hawaii fell -11.62% to 81.99.

• Highest risk states. Mississippi (152.67), South Carolina (139.27), and Louisiana (139.07).

• Lowest risk states. North Dakota (74.57), Minnesota (78.47), and Hawaii (81.99).

The Credit Risk Index is designed to encompass the level of risk across a population, such as the nation, in this case. Simply averaging credit scores across the national database doesn’t accurately reflect overall risk, according to Ezra Becker, vice-president of research and consulting for the credit reporting firm.

“Credit scores are not linear,” Becker explains. One aspect of this is that the lower a consumer’s original score, the more meaningful a given shift in score means. Because of the differing significance of movement at different points on the credit score range, the Credit Risk Index handles different parts of the credit score population differently.

In addition, any national numbers must be read and used against the local trends and credit performance that a given lender reads in the population it serves or potentially serves, according to Becker. However, Becker sees potential for consumer credit growth for those lenders willing to take on additional, though relatively lower, risk.

“With auto loan and credit card delinquency levels hovering near all-time lows for the last two years, and with mortgage delinquencies seeing their biggest drop in 2013 since the housing bubble, a decline in go-forward consumer credit risk would be expected,” said Becker. “However, it was a pleasant surprise to see the Credit Risk Index drop to levels not seen in nearly 10 years.”

Next week TransUnion is scheduled to announce a significant change in the “payment hierarchy” that it tracked through the Great Recession.