TransUnion studies risks related to credit card balance increases (NYSE:SYF)

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Consumers are reverting to pre-pandemic payment patterns, and while credit card delinquency rates overall are still lower than before the pandemic, Transunion (NYSE:TRU) said in a recent study it has identified early signs of when a credit card holder is running into trouble.

The study examined how early changes in payment behaviors can be identified in the weeks and months leading up to a first serious bankcard delinquency and whether risk levels could be differentiated based on changes in liquidity signals. It found that the deterioration of liquidity of those who eventually fell 90+ days behind occurred as soon as nine to 12 months before falling into severe delinquency.

During the height of the pandemic, credit card delinquency rates stayed unusually low as government relief programs helped consumers keep up with their bills. In addition, card issuers offered forbearance programs for cardholders who were affected by the pandemic. But those programs have since wound down. The only major moratorium still in effect is the pause on student loan payments, which is due to end on Dec. 31.

In August, card issuers delinquency and charge-off rates continued to slowly increase. Wall Street analysts have warned that the first signs of danger are likely to come from Bread Financial (NYSE:BFH) (formerly Alliance Data Systems) and Capital One Financial (NYSE:COF), both of which have a large exposure to low credit score consumers.

The TransUnion study tracked the liquidity situations of 5.9M consumers from Q3 2019 through Q4 2021 and split the population into two groups — consumers who stayed current throughout the study period (the control group) and those who fell more than 90 days past due on payments during some point in the analysis timeframe (the study group).Source: TransUnion

During the course of the study period, total credit card balances and total utilization remained relatively flat among the control group. And while consumers in the control group made larger payments to their card balances in relation to the minimum due, payments from those in the study group shrunk in size.

“Differentiating risk levels of bankcard consumers within each traditional credit tier can be especially important for lenders,” said Paul Siegfried, senior vice president and card and banking business leader at TransUnion (TRU). “By identifying these risk segments based on liquidity attributes, lenders can better evaluate their current account management strategies and credit line increase programs to grow low-risk consumers while mitigating loss from high-risk segments.”

In the past three years, of five pure-play credit card issuers, American Express (NYSE:AXP) stock rose the most, 22%, but still lagged the S&P 500’s 24% increase. Bread Financial (BFH) stock fared the worst, dropping 69%. Discover Financial (NYSE:DFS) stock rose 20% during the period, Capital One Financial (COF) rose 8.8% and Synchrony Financial (NYSE:SYF) fell 4.9%.

SA’s Quant system has a Strong Buy rating on Discover (DFS) and a Buy rating on Synchrony (SYF). AXP and COF are rated Hold, while Bread Financial (BFH) is rated Sell. See stats comparison here.

SA contributor Andrew Cournoyer explains why he’s not a buyer of Discover (DFS)

mphillips007/E+ via Getty Images Consumers are reverting to pre-pandemic payment patterns, and while credit card delinquency rates overall are still lower than before the pandemic, Transunion (NYSE:TRU) said in a recent study it has identified early signs of when a credit card holder is running into trouble. The study examined how early changes in payment…

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