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FICO Research Identifies Consumer Credit Behavior

Published March 23, 2012

Last November, Fair Isaac Corporation, the company behind the FICO® credit score, released a study entitled "How Much is U.S. Credit Behavior Changing?" The study analyzed score trends from October 2006 to April 2011 from a random sample of 10 million U.S. consumers with credit reports to determine the nature and extent of changes to consumer credit behavior triggered by the recent recession.

The study identified four behavior segments of interest that represented 51 percent of the sample population: Moderate and Subprime Holders, Rising Stars, Prime Holders and Fallen Angels. The numbers in each segment were based on a population of 200 million who have credit reports. Below are profiles of each behavior segment and how they fared during the economic downturn.

Moderate and Subprime Holders

Moderate and Subprime Holders represent 28.6 million consumers with credit reports, whose below-700 FICO scores stayed in the medium- and high-risk ranges during the economic crisis. This portion of the population continues to struggle with managing their credit and has not made changes to improve their credit. Interestingly, 39 percent of this group has a mortgage, and 64 percent have yet to default on their mortgage. They do, however, struggle with other types of credit. Only 6 percent of those that defaulted on mortgages were strategic defaulters.

Rising Stars

Rising Stars, the smallest behavior segment, represent 3 million consumers with credit reports. During the study period, these consumers' scores rose more than 100 points (from below 700 as of Oct. 2007 to above 700 as of April 2011). Approximately 45 percent of this segment has a mortgage, and even though their scores improved, they added more debt between May 2009 and April 2011: 23 percent opened new auto loans; 34 percent opened new credit card accounts; 39 percent opened new installment loans; and 65 percent opened at least one type of credit account.

Prime Holders

Prime Holders (FICO score above 700) are the largest segment representing 67 million consumers with credit scores. Over half, or 52 percent, have a mortgage and have been able to maintain stable credit scores. The 48 percent who do not have a mortgage clearly provide a huge opportunity for lenders. However, lenders will have to be innovative in order to gain wallet share from this group, as they are the most conservative at expanding credit.

Fallen Angels

Fallen Angels represent 4.3 million of consumers and include many who had good credit prior to the downturn, but saw their credit scores drop more than 150 points during the study period. For 72 percent of this segment, mortgage issues weren't the cause of their problems. In fact, 40 percent had no mortgage. Of the 60 percent with mortgages, 53 percent hadn't defaulted. However, those with defaulted mortgages continued to pay their other credit obligations, making them strategic defaulters.

Key Findings

So how much did U.S. consumer behavior change during the study period? According to the study, not as much as previously thought:

  • Consumer risk score distribution, at a national level, remained relatively stable.
  • The segments with the most change were the Fallen Angels and the Rising Stars, which represent only 4 percent or 7.3 million consumers. The Fallen Angels struggled the most to pay mortgages and other debt, which was indicated by the 150 point drop in scores. Many high-scoring consumers became even more conservative in their spending behavior by paying down their existing debt and avoiding new debt, thereby increasing their scores. Overall, approximately three million consumers substantially improved their creditworthiness.
  • While default rates worsened in most score bands during the economic downturn, a majority of Americans continued to pay their bills. Their scores remained high or improved, balancing out the downward pull on the national score distribution caused by people undergoing financial hardship.
  • Two distinct phases in consumer credit risk were noted. From 2005 to 2008, there was a movement out towards the two extremes of the score range. The 300-499 and 800-850 score band gained additional consumers. From 2008-2011, score distributions moved away from the ends of the range. The 550-599 and 600-649 bands – the bands in the middle – gained consumers during this time.
  • Recent improvements in credit card delinquencies were driven less by consumer behavior and more by tightening of credit policies by lenders. Lenders have reduced credit limits by $10,000 on an average consumer since 2008, which causes consumers to stop using credit cards.
  • Lenders granted new credit to a smaller select group of consumers.
  • At all FICO score levels, lower spending is the most striking change in consumer behavior.

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