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Inflation is having a broad impact on U.S. households. In the latest Market Pulse podcast, Jeff Richardson, SVP of Marketing at 庐, discussed how delinquencies are rising across credit segments and have even spiked to their highest level in nearly four years. 

鈥淚t鈥檚 a challenging time for consumers, especially those on the lower income scale,鈥� Richardson said. 鈥淚nflation isn鈥檛 just a statistic; it鈥檚 a daily reality affecting how people manage their finances.鈥�

He said continued pressure on certain consumer groups is fueling the delinquencies.

鈥淭he lower scoring consumers, lower income consumers and younger borrowers are more impacted by things like inflation and high rates,鈥� he said. 鈥淥verall, the economy is doing well, but for some, it's increasingly hard to meet their payment obligations. And that's why we're seeing the steady rise.鈥�

The Rise in Delinquencies 鈥� A Troubling Indicator

One of the episode鈥檚 key focus areas is the noticeable increase in delinquencies across credit segments. 鈥淥verall delinquencies have been rising. It鈥檚 been a slow and steady rise,鈥� Richardson observed, stressing that this trend cuts across various loan products and demographic groups. He attributes this phenomenon to the ongoing economic pressure exerted by inflation, particularly on vulnerable consumer segments.

Will this steady rise in delinquencies continue, and for how long? Richardson said he believes this trend will continue for a bit longer.

鈥淭he economy is humming. And as a result, we probably won't see the Federal Reserve lower interest rates to a significant degree, which means it's going to be very hard to manage debt and service debt. It's going to cost a lot for loans. People's money will not go as far as they want it to go. And inflation has not been curtailed,鈥� he said.

A Credit Tier Shift: Reflecting Economic Polarization

The a monthly analysis by VantageScore, reported that the VantageScore prime credit tier contracted 1.1% year over year. Richardson described this as a 鈥渢ale of two cities.鈥� 

鈥淲e鈥檙e seeing a higher volume of super prime borrowers and a higher volume of subprime borrowers. It鈥檚 a subtle yet significant bifurcation reflective of the broader economic disparity,鈥� he said.

鈥淚f you have a good income, you're invested in the stock markets, and you own a home, you're doing quite well. If you're on the opposite side of that spectrum, as I mentioned, getting gas, paying rent remains to be very expensive,鈥� Richardson explained.

The State of Credit Scores

Responding to audience questions from the January Market Pulse webinar, Richardson tackled the issue of credit scores in the context of the 2022 economic stimulus. 鈥淚 wouldn鈥檛 call them bloated or inflated,鈥� he asserted. 鈥淭he VantageScore models continue to rank vantage order effectively, which means they are still a reliable measure of consumer risk.鈥�

鈥淲hat did change was the default rate that any given score represents,鈥� said Richardson.

鈥淪o that's a dynamic nature of credit scores. When the economy struggles or is volatile, a 660 might represent a much higher risk than it would when the credit markets are calm and healthy. And we did see some volatility,鈥� he explained.

Tools and Strategies for Future Credit Decisioning

Looking ahead to credit decisioning in 2024, Richardson advised organizations on the necessary tools and strategies. 鈥淥rganizations should continue to benchmark against best-in-class models,鈥� he suggested, emphasizing the importance of adapting to the dynamic nature of the credit market.

Embracing AI and Advanced Analytics

The episode also explored the potential role of AI in credit decisioning. Richardson cautioned, 鈥淲hile AI offers exciting possibilities, the credit industry must navigate the complexities of full AI integration, mindful of regulatory concerns like the FICO and fair lending laws.鈥�

The Future of Credit Scoring

Richardson gave a glimpse into the future of credit scoring, emphasizing the evolving nature of these models. 鈥淲hat has changed for sure is the default rate that any given score represents,鈥� he explained. 鈥淩isk managers need to pay close attention to this dynamic nature of a score to risk relationship.鈥�

More Insights from Market Pulse

Be sure to check out the for insights on the economy, risk management, credit and financial stresses, the auto industry and more. It鈥檚 available on your favorite podcast app and . You can also register for upcoming Market Pulse webinars.