Unused credit capacity – a shift opportunity to vulnerability

December 18, 2009 by Kelly Kent

In a recent presentation conducted by The Tower Group, “2010 Top 10 Business Drivers, Strategic Responses, and IT Initiatives in Bank Cards,” the conversation covered many of the challenges facing the credit card business in 2010.  When discussing the shift from “what it was,” to “what it is now” for many issues in the card industry, one specific point caught my attention – the perception of unused credit lines – and the change in approach from lenders encouraging balance load-up to the perception that unused credit lines now represent unknown vulnerability to lenders.

Using market intelligence assets at Experian, I thought I would take a closer look at some of the corresponding data credit score profile trends to see what color I could add to this insight. Here is what I found:

• Total unused bankcard limits have decreased by $750 billion from Q3 2008 to Q3 2009
• By risk segment, the largest decline in unused limits has been within the VantageScore® A consumer – the super prime consumer – where unused limits have dropped by $420 billion
• More than 82 percent of unused limits reside with VantageScore A and B consumers – the super-prime and prime consumer segments

So what does this mean to risk management today? If you subscribe to the approach that unused limits now represent unknown vulnerability, then this exposure does not reside with traditional “risky” consumers, rather it resides with consumers usually considered to be the least risky.

So this is good news, right? Well, maybe not.

Vintage analysis of recent credit trends shows that vulnerability within the top score tiers might represent more risk than one would suspect. Delinquency trends for VantageScore A and B consumers within recent vintages (2006 through 2008) show deteriorating rates of delinquency from each year’s vintage to the next. Despite a shift in loan origination volumes towards this group, the performance of recent prime and super-prime originations shows deterioration and underperformance against historical patterns.

If The Tower Group’s read on the market is correct, and unused credit now represents vulnerability and not opportunity, it would be wise for lenders to reconsider where and how yesterday’s opportunity has become today’s risk.