A press release from TransUnion (one of the “Big Three” credit reporting bureaus) has announced that credit risk has increased in the United States for the fourth quarter of 2011, after seven quarters of decline dating back to 4Q of 2009. The Credit Risk Index (CRI) is the determining factor TransUnion uses to calculate credit risk. The CRI model is based on more than 200+ consumer-related variables that illustrate consumer credit use and performance on the whole. The 2011 Q4 CRI of 631 basis points is equivalent to the number from 2008 Q2, which was right before the recession began.
The risk increase in Q4 may be due to a number of factors, all reported by TransUnion:
- 6% increase in demand for consumer credit from Q4 2010
- Increase in consumers with bank cards.
- Increase in credit utilization, due to the holiday shopping season & other events.
- Banks and other Lenders offering more credit to consumers
- Risk of default leading to people taking on more types of credit.
The study also offered a yearly breakdown for 2011 and a state by state breakdown of credit risk. Unlike gas and rent prices, credit risk is not weighted by the major metro areas or East/West coasts. In fact, the states with the highest CRI (South Carolina, Nevada, Mississippi) and lowest CRI (North Dakota, Minnesota, South Dakota, Vermont) do not have major metropolitan markets.
TransUnion director of research & consulting Charlie Wise believes that delinquency rates on homes and mortgages may be a cause, “with delinquency rates on credit cards and mortgages both slightly rising in the fourth quarter”, according to the press release.
Although an increase in credit risk is a heavy burden for our recovering economy, we do not believe this release is cause for alarm.
Here are some potential causes to why this risk assessment index finally stopped its slide in the fourth quarter:
- Too much consumer debt taken on during this last holiday season, which had a huge sales boost over 2010`s numbers.
- Major product releases such as the IPhone 4S increasing the purchasing demand.
- Large Apple shopping boom surrounding the October death of CEO & visionary Steve Jobs.
- Increase in music/entertainment related purchases (for example, a 2011 uptick in music downloads spurred on by Adele`s “21”).
- Increase in profits for the gambling industry (by 12% in 2011, resulting in Nevada’s high CRI).
TransUnion notes that this increased demand for credit may be an indication of stronger consumer confidence and a revitalized US economy, which is not bad news at all. It seems the most likely cause is people spending more & asking for more credit to buy the things they love. An uptick in credit risk is ultimately a sign that consumers want to spend more & worry about their spending later.