The recent Equifax hack has received significant publicity and discussion. Consumers have been warned to freeze their credit files, use credit monitoring services, and be more proactive in checking their credit reports on a frequent, regular basis. This will change customer behavior and may impact the scorecards that are used.
Potential Impact on Credit Markets and Credit Bureaus
How will this impact the overall credit market? Clearly, the primary impact is that fraud activity is expected to increase. This may not surface immediately and may take months to show up.
Conservative, risk-averse customers will freeze their credit reports to protect themselves. Additionally, they may temper their appetite for new credit. These individuals tend to use credit for convenience, not because they need new credit. These are more likely older, financially stable, established individuals. By contrast, the individuals who need credit will continue on with little change – perhaps monitoring their credit situation. Younger persons, non-prime, sub-prime, and highly leveraged persons are unlikely to change their behavior – they use and open new credit out of necessity.
Another potential impact of the breach might be that lenders lose confidence in Equifax or feel pressure to move their business to other credit bureaus, similar to the IRS withdrawing their agreed contract with Equifax. Furthermore, regulators may demand increased privacy and security measures including the non-use of social security numbers. Alternative data providers may gain more of a foothold if they demonstrate tight security standards.
Once the new credit lock process is set up (where an individual can control the locking and unlocking of their credit file more easily than with credit freezes) and adopted by all credit bureaus, individuals are likely to lock their credit until they need it. They will open it for new credit, and later close the credit report after a credit decision is rendered.
It is likely that credit monitoring companies will become more prominent. Monitoring of the “dark web” will grow.
Potential Impact on Scoring Models
These changes will impact the population that will be scored in the future. The most immediate scorecard change that will be observed is due to the freezing of credit reports – a decrease in high quality, low risk customers. These will be the convenience users who have frozen their credit and reduced their credit usage. This will be observed at all credit bureaus, not just Equifax!
The pool of customers with high FICO or Vantage Scores will decrease. Creditors may notice changes in their applicant base – lower scores, more delinquencies, and younger applicants. These changes may be subtle or noticeable depending on the creditor’s target market and product. For instance, credit card issuers may see an uptick in the percentage of new customers that revolve their bankcard balances. If your company is a sub-prime lender, little change is expected other than changes resulting from enactment of the National Consumer Assistance Plan.
The number of inquiries in credit files will change. Once the low risk, risk-averse individuals are frozen, the remaining applicants will have higher numbers of inquiries on average. Also, if lenders move off of Equifax onto different credit bureaus, this would reduce the number of inquiries at Equifax and increase the inquiries at the other bureaus.
Trade lines will also be impacted. Older, inactive accounts may be closed. Fewer new trade lines may open. Usage rates may change – convenience users may decrease usage while necessity users will continue with high usage.
Public records should not be impacted by the change in behavior although regulators may become even tougher on having accurate data reporting. However, lenders need to be aware of changes to public records due to the recent National Consumer Assistance Plan.
Actions That Should Be Undertaken
Creditors should actively monitor credit score activity carefully:
- Be alert for changes in applicant population score distributions
- Track the average scores of your applicant population
- Track attribute distributions in your scorecards – especially inquiry and trade attributes
Be flexible and ready to make changes to:
- Score cut-offs
- Credit policies
- Credit bureau mix (credit inquiries directed to bureaus)
- Assess whether you have the tools necessary to make changes quickly:
- Tri-bureau normalized attributes – so that you can direct inquiries to any of the three major credit bureaus
- Score and decision engines – to flexibly change score and policy rules
The ramifications of the Equifax hack will be significant and industry-wide. As always, creditors who are analytical, aware of changes in customer behavior, and able to make nimble changes will be the ultimate leaders in this time of change.
Lending Science DM can help with the monitoring of score results and changes observed in applicant populations. Please call us at 800-769-3050 or contact us here.
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