The results of TransUnion’s new global credit study challenge some industry perceptions and give direction to those wishing to serve new-to-credit (NTC) consumers.
Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers is available here.
TransUnion looked at NTC consumers who opened credit cards as a subsequent product over the next two years, along with the delinquency rate after six months. The numbers were compared to longer-term customers who opened cards in the same period.
What we know about NTC consumers
In 2021, Generation Z accounted for 59% of NTCs, followed by Millennials (21%), Generation (12%), and Baby Boomers (seven %). Credit cards are the most common entry points in many regions worldwide.
Save for India, a majority of NTC consumers received a credit product on their first try. The rate was 54% in the United States.
In Canada and the United States, having a convenient means to spend is the most common reason for getting a card. In most other regions, it was new expenses.
After opening their first account, American NTC consumers saw slightly higher delinquency rates than credit-served customers in the same prime and near-prime ranges. Those differences are small enough that NTCs should be attractive growth sources for many lenders.
NTC consumers are worth the risk
In 2021, 5.8 million Americans obtained their first credit product; three million more joined them in 2022’s first half. Lenders should welcome them with open arms, TransUnion’s head of global research, Charlie Wise, said. NTC consumers perform better than borrowers with established histories and similar risk scores.
“We believe that a lot of this is that consumers understand the value of the credit they have and want to preserve it,” Wise said. “They know that if they miss payments if they get overextended, they’ll lose access to this thing that was fairly hard to get in the first place.”
NTC consumers often get small initial limits so they cannot build up large balances, Wise added. Credit lenders for prudent risk assessment practices. Once they show good behavior, higher limits can be provided.
BNPL isn’t a gateway
While most BNPL providers don’t provide ongoing reports to bureaus, TransUnion does see who applies for the service. Between 80-90% already have a credit card in their wallet but are attracted to multiple no-interest payments.
“The people using BNPL… if you look at their credit, they have, on average, more credit products than people who aren’t applying for BNPL, higher levels of spend activity on their cards,” Wise said. “These people are credit active and use BNPL as an alternative.”
Consumers are affected by the environment around them
Consumers are influenced by macro factors present when they mature and then begin their financial lives. Between 2008-2015, the crash shaped many a financial outlook. NTC consumers saw their parents lose resources in a tough job market.
That changed between 2015 and COVID-19. Graduates enjoyed a strong labor market and rising stock prices. They were likelier to see credit as a means to better financial mobility.
Wise said that graduates over the past three years had seen a pandemic, war, and the highest inflation in decades.
How credit is viewed around the world
In developed markets, credit cards dominate, Wise said. Providers are comfortable extending risk across the spectrum.
That’s not the case in India. Most see credit cards as niche products for the upper middle class and the rich. It’s common for the upper strata to have multiple cards. The masses use consumer durable and agricultural loans similar to point-of-sale financing.
In South America, clothing loans are common entry points into credit.
The influence of new technology varies depending on a country’s data restrictions.
Markets have their regulations on how data can be used to assess risk. In India, data is widely used in various models influencing credit scores. By employing demographic data, providers can build geographic-based models where risk can be assessed based on the profiles of those similar to the applicant.
“We would not be able to do something like that in the United States because of what that means for redlining,” Wise said. “But in India, there’s a big push towards that, and that’s very much encouraged by the regulators.”
The growing importance of alternative data and one hangup
Wise said he’s been watching non-traditional data sources like successful subscription service payments for some time. TransUnion has an alternative data score incorporating streaming accounts, health club memberships, and magazine subscriptions.
In countries like the USA, disclosure rules mandate that those submitting to credit bureaus have dispute mechanisms in place if people need to file a dispute. Many businesses, like smaller landlords, don’t have the desire or capacity to implement such tools.
“We are actively working on getting rental payments reports on the bureaus, which works great for large multi-tenant housing owners,” Wise said. “But realize how many rents in the United States are somebody renting out a spare bedroom or a flat in their building. They don’t want to be dealing with that.
“We’re going to put in place an intermediary that can handle that on their behalf because transparency and the ability to correct incorrect data is paramount to the credit system.”
TransUnion also asked respondents about their future financial plans. No surprise, but many expect their credit needs to grow. The rate is highest in India, where 79% expect their need to grow in the next three to five years. Other developing markets also have strong rates. Over half (52%) of American NTC consumers see their needs growing over that span.
Mortgages top the list, with many recognizing they don’t likely qualify no. It’s a goal they’re pursuing.
“It’s good that consumers have a forward-looking view of credit, which means they’re thinking about it,” Wise said. “These education efforts appear to be working. We have a pretty well-informed consumer, hopefully serving us better than what we saw collectively back in 2008-2009.”
Developing loyalty with NTC consumers
Bait the hook by making lending products convenient to NTC customers, and you may be able to reel them in in the future. In most regions (Brazil is the exception), convenience is the top factor. In the US, 33% said it was the principal reason.
More than half (57%) of all US NTC customers who opened a personal loan as a subsequent origination within two years after opening their first trade did so with their first account lender.