December 2016 Fed Rate Hike: Most Consumers Fared Well, But it’s a New Dynamic for Consumers and Lenders Alike
July 20 2017 - 6:00AM
TransUnion (NYSE:TRU) released an analysis today showing that most
borrowers were able to absorb their increased monthly payment
obligations after the Federal Reserve Board rate hike last
December.
TransUnion’s study identified these 63 million consumers because
they carried debts for which the minimum monthly payment due was
tied to the market interest rate, such that a rise in rates from
the December rate hike could cause an increase in payments
required. TransUnion used its CreditVision® aggregate excess
payment (“AEP”) algorithm, which incorporates monthly payments from
mortgages, credit cards and other debt obligations, to identify
10.6 million of these consumers who were at elevated risk of not
having the capacity to absorb a rate increase of 0.25%.
The study then tracked the performance of these consumers
through the end of March 2017, to give the December rate increase
enough time to affect payment obligations. The study found that, in
fact, only one million of these consumers were delinquent at the
end of March. This was slightly lower than the study’s control
group, who had no variable-rate products. This result implies that
consumers with variable-rate credit were able to manage the rate
increase as well as, or better than, consumers without
variable-rate products.
“When we announced our ‘capacity to absorb a rate increase’
metric last May we said that it was a conservative measure of risk,
in that it did not account for contributions to savings or
investments that could be reallocated to cover debt service
increases,” said Ezra Becker, senior vice president of research and
consulting at TransUnion. “We described our metric as an upper
bound on the number of consumers who would struggle with a rate
increase. We’re pleased to see that only 10% of those consumers we
had considered at elevated risk of payment shock from a rate
increase exhibited delinquency over the study period. Most
consumers appeared able to reallocate their available cash, or make
small changes to their spending habits, to effectively absorb the
December rate increase.”
TransUnion’s study further found that of those one million
consumers with delinquency in March, 70% had higher balances at the
end of the study than they did in November. “Minimum payments are
as much a function of balances as they are of rate,” continued
Becker. “Increased balances can lead to liquidity constraints
regardless of how rates move. Consumers should always be careful to
manage their credit usage within the limits of their income.”
TransUnion’s control group of approximately 44 million consumers
held no variable-rate credit products, and hence had no
vulnerability to rate increases, over the same time period.
Interestingly, 5.6 million consumers in the control group (13%)
showed delinquency on at least one product by the end of March. In
fact, the control group showed higher delinquency rates than the
test group even when controlling for credit score.
For example, 443,000 of the 1.26 million subprime consumers
identified as having elevated risk from a rate increase in the test
group (35%) were delinquent in March. In contrast, 2.78 million of
the 4.89 million subprime consumers in the control group (57%) were
delinquent at the end of the first quarter. “It was really
surprising to us that the control group exhibited greater
delinquency rates than those vulnerable to a rate increase in our
study,” said Becker. “There are clearly some interesting dynamics
at play here that we don’t yet fully understand, but this initial
study does seem to indicate that the 0.25% interest rate increase
in December did not drive any material delinquency in the immediate
term for consumers.”
Even so, TransUnion offered some words of caution for both
consumers and lenders. The study only provides an analysis of
immediate-term impacts from the rate increase, and does not explore
how consumers might be impacted over a longer period. For example,
consumers meeting their payment obligations in the months after a
rate increase by dipping into savings might eventually exhaust that
source of funds. As well, the study only evaluated a 0.25% rate
increase—larger rate increases could have more material impacts on
consumer credit performance.
“It is important for both lenders and consumers alike to be
cognizant that a rising-rate environment presents a different
dynamic than a steady-state or falling-rate environment. For
lenders, a rising-rate environment does present the risk of default
due to payment shock. For borrowers, there is now a need to
recognize and plan for the fact that rising rates may cause their
monthly payment obligations to increase. The key for both parties
is awareness and planning.”
“Above all else, consumers should keep in mind the foundational
principles of credit health, which are especially crucial when
working to build credit,” said Heather Battison, vice president of
consumer communications at TransUnion. “It’s imperative to make the
minimum payment due, on time, on all of your bills.”
For more information on the impact of Federal Reserve Board rate
hikes and how to use TransUnion CreditVision® to analyze consumer
capacity to absorb payment shocks, visit
http://www.transunioninsights.com/interestrates.
About TransUnion (NYSE:TRU)
Information is a powerful thing. At TransUnion, we realize that.
We are dedicated to finding innovative ways information can be used
to help individuals make better and smarter decisions. We help
uncover unique stories, trends and insights behind each data point,
using historical information as well as alternative data sources.
This allows a variety of markets and businesses to better manage
risk and consumers to better manage their credit, personal
information and identity. Today, TransUnion has a global presence
in more than 30 countries and a leading presence in several
international markets across North America, Africa, Latin America
and Asia. Through the power of information, TransUnion is working
to build stronger economies and families and safer communities
worldwide. www.transunion.com/business
Contact
Dave Blumberg
TransUnion
E-mail dblumberg@transunion.com
Telephone 312-985-3059
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