Lenders need to be preparing today to meet the needs of new-to-credit consumers that may come up several years down the road, TransUnion said.
In the United States, 5.8 million consumers opened their first credit product in 2021 with another 3 million during the first half of 2022. That was on top of 6.1 million in 2019 and 5.1 million in 2020.
TransUnion defined a new-to-credit consumer as one without a prior history in their file that took out their first traditional credit product.
Those include credit cards, auto loans, home loans, personal loans, student loans and retail store card accounts. In 2021, 59% of people in this category opened a credit card as their first product, followed by an auto loan 13%, and a private labeled store card, 8%, according to the report, Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers.
However, “the new credit consumers of today are going to be the mortgage borrowers of tomorrow and tomorrow might be five or 10 years [away],” said Charlie Wise, head of global research and the co-author of the study, in an interview. “But this is the first step to building the credit history and the credit score that is going to be needed to get a mortgage.”
The study looked at new-to-credit borrowers starting in 2019 and if a U.S. consumer opened a new trade line in the next two years, the next product was also likely to be a credit card. Once again, this is allowing consumers to build a track record that will allow them to get a mortgage at the time that is right for them, Wise said.
But survey respondents thought that they would have some difficulty in obtaining home financing as part of their future credit needs.
When asked which credit products they don’t feel they have access to, “the No. 1 answer is mortgage; 32% of those [new credit consumers] said I don’t have access to mortgage today,” Wise noted.
For 2021, Gen Z was the largest segment of new-to-credit consumers at 59%, the oldest of which are approximately 28 years old and not quite yet in prime home buying age, Wise said. They were followed by millennials (21%), Gen X (12%) and baby boomers (7%).
The younger consumers recognize that building a credit profile is something that is going to take some time. “This is something that younger borrowers in particular are already thinking about as a reason to practice good credit habits,” he said.
To determine if these new-to-credit consumers were making their payments, the study looked at those who opened a subsequent credit card during the following two years and the delinquency performance after six months on the second debt product.
In the near prime and prime credit score bands — where many NTC consumers fall early in their credit journeys — their delinquency rate was comparable to, or even better than, more established credit-served consumers, TransUnion said.
For the study in the U.S., TransUnion used the VantageScore 4.0 model, which defines near prime borrowers with scores between 601 and 660, with prime at 661 or higher.
To reach these new-to-credit borrowers in the future, debt providers must tailor the experience to meet their early stage needs.
“Lenders need to understand which credit products are most needed and valued by NTC consumers as their first product and over their initial two-year journeys,” the report said. “In addition to availability of the right products, convenience, fast approvals/funding, relevant benefits, appropriate credit lines and pricing are all important considerations.”
Increased use of alternative data to assess the creditworthiness of these borrowers is also required.
“Banks, credit unions and other financial institutions who use alternative data while providing products, channels and a positive onboarding process, will likely be the ones who succeed in building loyalty with this segment of the population,” said the report’s other co-author Michele Raneri, head of U.S. Research at TransUnion, said in a press release.
Initiatives to increase the use of alternative data in underwriting for thin credit file borrowers has recently picked up steam.
This includes the announcement by Federal Housing Finance Agency Director Sandra Thompson at Mortgage Bankers Association annual convention in Nashville back in October of updates to the credit scoring models the government-sponsored enterprises can use in their automated underwriting systems.
Just prior to the MBA convention, another credit repository, Equifax added alternative data to its mortgage credit reports.
“This data can also be used to identify lower-risk borrowers and provide better terms and pricing — which are cited as top reasons NTC consumers don’t accept the offers they receive,” the report noted.
Lenders need to conduct frequent reviews of their portfolios of new-to-credit borrowers, in large part for potential product cross-selling opportunities as well as building brand loyalty and retention, it found.
However, cross-selling activity needs to be conducted carefully, as Wells Fargo’s recent pitfalls have shown.
It is important to ask your customers what their goals are in their lives, rather than just pushing products, Wise said. “Lenders ought to be understanding the needs of the consumers where they are, what they need and positioning the right products for them.”
