Lenders need to prepare today to meet the needs of potential borrowers a few years down the road, TransUnion said.
In the United States, 5.8 million consumers opened their first credit card in 2021 and another 3 million in the first half of 2022. That was up from 6.1 million in 2019 and 5.1 million in 2020.
TransUnion defines a new-to-credit customer as someone without a previous history on their file that has used their credit products before.
These include credit cards, car loans, home loans, personal loans, student loans and store credit. In 2021, 59% of people in this group opened a credit card as their first product, followed by a car loan 13%, and a store card, 8%, according to the report, Empowering Credit Inclusion: A Deeper Perspective on New Credit Consumers.
However, “today’s new mortgage borrowers are going to be tomorrow’s mortgage borrowers and tomorrow may be five or 10 years (different),” said Charlie Wise, head of research around the world and the author of the study, in an interview. “But this is the first step in building the history and credit score that will be needed to get a mortgage.”
The study looked at new credit card borrowers starting in 2019 and if a US customer opens a new line of business in the next two years, the next product may be a credit card. Another thing is to allow customers to build a portfolio that allows them to get a mortgage at the right time for them, Wise said.
But the survey respondents thought that there would be some difficulty in obtaining housing financing as part of their future needs.
When asked which credit products they don’t feel they can get, “the No. 1 answer is a mortgage; 32% of them (new credit customers) say I don’t have a mortgage opportunity today ,” Wise said.
For 2021, Gen Z will be the largest group of mortgage buyers at 59%, the oldest group is about 28 years old and has not yet reached home buying age, Wise said. This was followed by millennials (21%), Gen X (12%) and baby boomers (7%).
Of the small customers know that building a credit history is a time-consuming process. “This is something that the small creditors have been thinking about for a long time as a reason to implement good debt practices,” he said.
To find out if these credit card customers were making their payments, the study looked at those who opened a credit card later in the two years following default and those who had defaulted within six months. on the second product of debt.
In recent credit cycles – where many NTC customers fall quickly in their credit journey – their default rate is comparable, or Even better than that, credit card payments, says TransUnion.
For the study in the US, TransUnion used the VantageScore 4.0 model, which defines close to first-time borrowers with scores between 601 and 660, and the highest at 661 or more.
To reach these borrowers in the future, lenders must adapt the experience to meet their initial needs.
“Lenders need to understand which credit products NTC customers most want and value as their first product and in their journey first two years,” said the report. “In addition to having the right product, convenience, quick approval/financing, reasonable benefits, reasonable credit lines and prices are all important factors.”
Increase the use of other information The creditworthiness of these borrowers also needs to be considered.
“Banks, credit unions and other financial institutions that use other information while providing products, methods and a good process on the board, they will probably succeed in building credibility with this group of readers. amount,” said another reporter Michele. Raneri, head of US Research at TransUnion, said in a press release.
Plans to increase the use of other information in underwriting for thin credit files have recently been put into motion.
This includes the announcement by the Director of the Federal Housing Finance Agency Sandra Thompson at the annual meeting of the Mortgage Bankers Association in Nashville back in October of updates on credit scoring models Governments can use it in their automated registration systems.
Before the MBA convention, another credit institution, Equifax added other information on his mortgage report.
“This data can also be used to identify low-risk borrowers and offer better terms and prices – cited as the main reasons why NTC customers do not accept the offers they receive,” the report said. this.
Lenders are required to conduct ongoing reviews of their new borrower records, in large part for potential products. sales opportunities as well as building loyalty and retention, it was found.
However, it is necessary to carefully manage sales activities, such as Wells Fargo’s recent pitfalls is revealed.
It’s important to ask your customers what their goals are in their lives, rather than just pushing products, Wise said. “Lenders must understand the needs of consumers where they are, what they need and position the right products for them.”