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Market Pulse is a monthly podcast by Equifax, in partnership with Moody’s Analytics. Equifax hosts bring you interviews with industry experts on the latest economic and credit insights that can help drive better business decisions. Whether you’re in financial, mortgage, auto or another service industry, we help make sense of the latest economic conditions that impact you. This podcast series supplements our Market Pulse webinars, which occur on the first Thursday of each month.
Welcome to the Market Pulse podcast from Equifax, where we break down the latest economic and credit insights to help you navigate today's business landscape.
Olivia Voltaggio:Welcome to the Market Pulse podcast from Equifax. I'm your host, Olivia Voltaggio, a senior content manager for US Information Solutions Business here at Equifax. In today's episode, we're going to discuss how inflation is impacting households. Joining me is Jeff Richardson, SVP Marketing Vantage Score. He was a guest on our January Market Pulse webinar, which focused on affordability.
Olivia Voltaggio:We'll continue that conversation today and answer viewer questions submitted during the webinar. I'd also like to mention that Jeff is a podcast host too. He hosts the SCORE podcast where he interviews the new leaders shaping the credit industry, like journalists, academics, and researchers. So be sure to check that out. Welcome to the show, Jeff.
Olivia Voltaggio:Great to see you again.
Jeff Richardson:Thank you for having me back, Olivia.
Olivia Voltaggio:Jeff, for those of our listeners who are unfamiliar with Vantage Score and their role in the market, could you give a brief overview of the company and your role within it?
Jeff Richardson:I'd be happy to. VantageScore is an independently managed company jointly owned by the 3 credit reporting companies, Equifax, TransUnion, and Experian. And we develop and and maintain the VantageScore credit scoring models. There are 4. The latest version is VantageScore 4.0.
Jeff Richardson:And those models are used across the credit marketplace in all your typical loan categories, credit card, auto loans, personal loans, and and mortgage loans. When we last counted, there were 19,000,000,000, VantageScore credit scores used in the marketplace. 9 out of the top lenders are are using our models. So it's really one of the mainstream tools that lenders use to gauge consumer's creditworthiness when they apply for a loan. My role, as head of marketing is to educate the marketplace about what Vantagecore brings to the table, how we're different, how we are improving access to credit for for consumers and helping lenders grow their businesses by by using our models.
Jeff Richardson:So, talk to lenders, every day and and learn kinda what the key challenges they're facing. And then we, as a as a company, help to provide solutions to them.
Olivia Voltaggio:Before we jump into our main topic, let's get a brief economic update from David Fieldhouse, director of consumer credit analytics at Moody Analytics. David?
David Fieldhouse:The US has been experiencing a very strong economy. The GDP growth rate is 2.5% in the last year and is expected to increase to nearly 2% in the Q1 of this year. This has resulted in a rise in stock prices, housing values, which has increased household wealth and consumer spending. However, the high prices in the stock and housing markets are vulnerable to a correction right now, particularly if the Federal Reserve maintains a tight monetary policy. If there is a sustained double digit price decline, it could pose a significant threat to the economy.
David Fieldhouse:Furthermore, the US economy has been creating jobs really around a quarter of a1000000 per month. This has really been attributed to a surge in foreign immigration, which has increased the labor supply, allowing for, stronger job growth and economic growth, without too much inflation. Looking ahead, we expect to see a slight uptick in the unemployment rate to, 4.1%. And, early next year, we're also expecting to see a deceleration in the monthly pace of hiring to below a 100,000, and and that may happen as soon as Memorial Day. The economic landscape is set against a backdrop of risks.
David Fieldhouse:These include the high interest rates, the, you know, concerns for inflation, and the upcoming presidential election. However, despite these challenges, the US economy has shown resilience buoyed by, a surge in stock prices and housing values that have significantly increased household wealth and consumer spending. Nevertheless, the concentration of asset holdings amongst the wealthiest households and the risks of a correction asset prices could threaten economic stability. In terms of consumer credit, Moody's Analytics, our our baseline forecast predicts consumer credit card balances will experience a deceleration increasing to only 1.5% compared to the 4.5% a year ago. The slowdown can be attributed to higher borrowing costs, which have dampened demand.
David Fieldhouse:The 30 year fixed mortgage rate has doubled from its January 2022 level of 3.5%, while the average interest rate on the 60 month new auto loan has increased, from 4.5% to more than 8%. Unsecured markets have seen similar shocks. The average credit card rate has risen from 14.6% to 21.5%, while personal loan rates have risen 300 basis points to 12.4%. It's no surprise that higher borrowing costs have chilled demand. And, additionally, for consumer credit markets, there are concerns about a softer job market, which would curb consumer finance expenditures, and slow down credit card usage and auto loans.
David Fieldhouse:Despite these challenges, we expect, a potential easing of short term rates by the Federal Reserve starting in June, and that could help support a rebound in consumer credit markets. Thank you.
Olivia Voltaggio:Thanks, David. Jeff, it made headlines when Managed Score reported that delinquencies in January spiked to the highest level in nearly 4 years, and that was across all credit segments. What factors contributed to this?
Jeff Richardson:It is true. Overall, delinquencies have been rising. It's been a slow and steady rise, and that I think is is true across loan products and credit tiers and age groups. What's driving it is, you know, there's there's continued pressure on certain groups of consumers. Certainly, the lower scoring consumers, lower income consumers, and younger borrowers are, more impacted by things like inflation and and high rates.
Jeff Richardson:Overall, the the economy is is doing well, but for some, it's increasingly hard to meet their payment obligations, and that's why we're seeing the steady rise.
Olivia Voltaggio:Is this a trend that's expected to continue?
Jeff Richardson:I think so for for a little while. You know, the the the economy is is humming. And as a result, we probably won't see the Federal Reserve lower interest rates to a significant degree, which means it's gonna be very hard to manage debt and and service debt. It's gonna cost a lot for loans. People's money will not go as far, as they want it to go, and inflation has not been been curtailed.
Jeff Richardson:So as a result, it's it's more expensive to buy goods and services, puts pressure on the monthly budget, and at least for the time being, we'll probably see delinquencies continue to rise.
Olivia Voltaggio:And yet rising delinquencies don't show the whole picture. While some consumers dropped from the VantageScore prime credit tier into subprime, others moved up to the VantageScore subprime credit tier. This indicates 2 very different consumer segments. Why is this happening, and what does it mean for banks and lenders?
Jeff Richardson:It it's, Olivia, a tale of 2 cities. You know, the Wall Street Journal interestingly reported on this today. If you're, doing well off, you have a good income and you're invested in in the stock markets and you own a home, you're doing quite well. If you're on the opposite side of that spectrum, as I mentioned, getting gas, paying rent remains to be very expensive. And and so what we're seeing is, that sort of prime segment, some consumers move up because, maybe they got some, you know, good good government stimulus and paid down balances and, gotta, refinance their house, and and so they're doing really well.
Jeff Richardson:So we're seeing those consumers move up, but, of course, we're seeing the opposite, go down. And what that means is there's a higher volume of super prime borrowers and a higher volume of, subprime borrowers. Now this isn't a a massive bifurcation, but it is a dynamic that's occurring.
Olivia Voltaggio:Dive into some audience questions from the Market Pulse webinar. 1 attendee wants to know if you have any updated thoughts or comments around whether 2022 scores were bloated by stimulus, lower discretionary spending, etcetera. And if so, by what percentage? Do you feel the scores have normalized yet, and what are some related data points that confirm what you're seeing on that front?
Jeff Richardson:Yeah. I I wouldn't call them bloated or inflated. The the reality is is that the bench score models ranked ordered very well during the pandemic and continue to to rank order. And what that means is those with higher scores are are defaulting to a lesser degree than those with lower scores. And so it remains a very effective tool for comparing consumers relative to the risk that they they represent.
Jeff Richardson:What has changed, for sure, is the default rate that any given score represents. Right? So that's a dynamic nature of credit scores. When the economy struggles, when it's volatile, a 6.60 might represent a much higher risk than, it would when the the credit markets are calm and healthy. And we did see some volatility more recently, and so, risk managers had to sharpen their pencils.
Jeff Richardson:And coming out of a a long time frame of of relatively easy, you know, risk management, there wasn't much delinquencies, in the in the marketplace. Risk managers had to had to manage that, and so they had to pay close attention to this dynamic nature of a score to to risk relationship. So that that did increase, and we're we're kinda still in that mode, if you will. Certainly, the consumers benefited from receiving government stimulus and paying down balances. The score represented their risk at at any given time, and and how they've moved, since then is something the risk managers really need to pay attention to.
Jeff Richardson:And so, we've invested in that. We we wanna make sure that we're as transparent, around those issues as as we possibly can. And what I would point to lenders and and others in the market place is to use our our risk ratio tool. And what risk ratio is, it's a free tool on our website that on a quarterly basis tracks that score to default rate relationship. And you can look at it overall, you can look at it by product type, you can look at a different performance,
David Fieldhouse:a
Jeff Richardson:time horizons, and the feedback that we get is that it really helps, lenders benchmark where they are versus the industry. It helps them calibrate where they need to be relative to kind of their score cutoffs and and and what their desired risk tolerance is.
Olivia Voltaggio:And in fact, according to a poll we ran on the January Market Pulse webinar, nearly 50% of respondents indicated their organization was planning to maintain the status quo in their credit decisioning for 2024, while nearly 46% of respondents said their organization was approaching their 2024 credit decisions by tightening. What are some tools and strategies these organizations should have in place to be more confident about their decisioning?
Jeff Richardson:That's a great question, and I I I do wonder if we did that whole today whether we'd see the same, breakout. It was it was basically equal. But what we would encourage lenders to do is continue to test and benchmark, against the best in class models, models like bench score 4.0. And if you're not using a model you know, if you're not using the the raw trended data, you're definitely leaving risk insight on the table. What trended data is is it tracks the performance of a a consumer on a particular loan product over time versus a snapshot just in the past month.
Jeff Richardson:And if you are tightening, your your your credit policies, if you're lowering your score cutoff, you wanna use a model that that scores as many people as possible, because that that limits the number of approvals you might be leaving on the table. And be be razor sharp with tracking that score to risk relationship using tools like, risk ratio as I mentioned. And I guess if I mention risk ratio, I should also mention some of our other digital tools like CreditGage, which looks at, consumer credit health in the United States. And then we also have a really cool tool called inclusion 360 that tracks, where there are regions of the United States where there's financial inclusion opportunities. So all these tools are free and and on vantage score, dot com.
Jeff Richardson:End of plug.
Olivia Voltaggio:And speaking of, decision making technology and tools, in another poll we ran on the webinar, about 32% of respondents said their top New Year's resolution for their organization is to incorporate AI into their decision making processes. Does this line up with what you're hearing from customers, and what are some examples you're seeing that could be particularly impactful and relevant for our listeners?
Jeff Richardson:In a sense, it does line up. AI can be used in any number of of decision processes. I don't think we're kind of there from a mainstream credit decisioning standpoint. I think that lenders still are hesitant of using kind of full AI models because of FCRA concerns and and fair lending concerns. Of course, AI factors heavily into other models like like fraud models, and and that's been the case, for a number of years.
Jeff Richardson:There's there's nothing new about using AI there. What what we're hearing from lenders is that the pandemic is far enough in the rear view mirror, and that we're entering into a new cycle. And as a result of that, they're rebuilding their custom scorecards, their custom underwriting strategies, looking at different generic credit scores as inputs to those custom strategies, and really making sure that they're ready to optimize their underwriting policies for 2024 and beyond.
Olivia Voltaggio:On the webinar, you and our risk advisory leader, Tom Aliff, talked about differentiated data and its role in predicting risk. While risk mitigation is obviously a top priority to lenders, especially in this environment, what are some opportunities that differentiated data can open up for these lenders, and how does this impact consumers in turn?
Jeff Richardson:Well, I'll I'll give a nod again to to trended data. If you're not using a scoring model that's incorporating that, or some sort of attributes that use trended data, you're leaving, quite frankly, money on the table. The future, of credit scoring is that we'll be looking at both sides of a consumer's balance sheet. And what I mean by that is credit file data remains highly predictive and incredibly useful from a credit decisioning standpoint. But increasingly, we're able to look at both sides of a consumer's balance sheet, including their cash flow behaviors.
Jeff Richardson:And so the technology now allows us for consumers to actually permission access to their bank accounts so that we can better score them, based on how they manage their cash flow. And so, we are seeing a lot of traction in that area. We're piloting a model with a lot of the largest lenders in the United States, and what we see is increased predictive performance, tremendous financial inclusion opportunity, and the the ability to empower consumers to to take back control of their of their data, which is sort of the win win win, that, I think we're all looking for. So we see that as a really useful tool moving forward.
Olivia Voltaggio:Absolutely. Jeff, thank you for joining us today. If our audience would like to follow-up with you, where can they connect with you?
Jeff Richardson:So you could email me at jeffricherson@vantagecore.com. All of our digital tools are available on our website, advantagecore.com. We're really active on social media. The best place to get all of the latest and greatest information about VantageScore is to follow us on LinkedIn. So follow us on LinkedIn, everybody.
Olivia Voltaggio:Thank you, Jeff. If you enjoyed today's episode, tell your friends about us and subscribe. If you'd like to send us questions or suggest topics for future episodes, email us at marketpulsepodcast@equifax.com. And don't forget to register for our Market Pulse webinar series@equifax.comforward/marketpulse. We provide relevant economic and credit insights to help your business make more confident decisions.
Olivia Voltaggio:Thanks for listening, and please join us next time.
Outro:The information and opinions provided in this podcast are intended as general guidance only and are subject to change without notice. The views presented during the podcast are those of the presenter as of the date this podcast was recorded and do not necessarily reflect official positions of Equifax. Investor analysts should direct inquiries using the contact us box on the investor relations section at equifax.com.