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Economic challenges transform consumer risk profiles

With the recent release of first-time unemployment applications by the Labor Department showing weaker than expected results, it comes as no surprise that July foreclosure rates  also reflect the on-going stress being experienced by consumers across the nation. When considering credit score trends and delinquency measures across credit products, it’s interesting to see how these trends appear to be playing out in terms of their impact on consumer score migration patterns.

Over the past year or so, it appears that the impact of a struggling economy is the creation of a two-tier consumer credit system. On one hand, for consumers with stronger credit risk scores who are able to successfully manage their financial obligations, we see stability in the composition of the prime and super-prime population. On the other hand, as other consumers face challenging times, especially through joblessness and reductions in real-estate equity, there are consumers who experience significant credit management issues and subsequently, their risk scores decline.

The interesting phenomenon is that there seems to be fewer and fewer consumers who remain in between these two segments. Credit score migration patterns suggest the evolution of two distinct consumer populations: a relatively stable, lower-risk segment, and a somewhat bottom-heavy higher-risk population, comprised of consumers with long-term repayment challenges, recent foreclosures, repossessions and higher delinquency rates.

Clearly, this type of change in score distribution directly impacts lenders and their acquisition and account management strategies. With few signs of a pending economic recovery, it will be interesting to watch this pattern develop in the long-term to see if the chasm between these groups becomes wider and more measurable, or whether other economic influences will further transform the consumer credit landscape.