New to Credit: 5 Theories Tested

As acquisition costs continue to rise, it’s becoming more important for lenders to understand the behaviours and relative risks of consumers in the new-to-credit segment. Some of these behaviours confirm conventional wisdom about this market; however, there are important nuances to be aware of. Knowing what these are, and understanding the dynamics behind them, can help lenders to identify and take up opportunities in this market. We look at five theories and see how they hold up against the data.

The opportunity

Every year, about 900,000 new-to-credit consumers approach the credit market—a material market size that presents significant opportunities to lenders. With the average cost of acquisitions rising steadily (currently above inflation for bank cards), it’s becoming more important for lenders to maximize the opportunity presented by these consumers.

The perceived challenges

New-to-credit consumers are those whose oldest trade line is less than six months. Conventional wisdom says this presents a number of challenges to lenders, who would be wise to approach this segment with caution. There’s the belief that most of these consumers will be young, in the subprime risk tier, and that they have unique credit needs that can be hard for lenders to make decisions about—especially with limited credit history.

A recent TransUnion study of new-to-credit and credit-established consumers tested some of this conventional wisdom and revealed some interesting findings.

The theories and the data

1. A consumer’s first score is a subprime score
While new-to-credit consumers are less likely to be in the same or better risk tiers than credit-established consumers, they’re closer than you may think.

Our findings showed that almost half of new-to-credit consumers could be classified prime or above. Of these, 44% were in the prime or prime plus category, with a credit score between 700 and 829, and 1% were super-prime, with a credit score of 830+. This is different than what we observed in the United States, where almost half of new-to-credit consumers were subprime.

As the graphs above show, while the profiles for these two groups are different, new-to-credit consumers are not much more likely to be classified in the subprime category than established consumers.

2. New-to-credit consumers have more volatile scores
Looking at changes in credit scores over 24 months, we found that new-to-credit consumers are more likely than established customers to see score changes of between 150 and 300 points. Possible reasons for this vary and can cause scores to either decrease or increase: younger customers tend to make more ‘credit mistakes’ and have fewer trade lines which lowers their score, but they could also build a positive credit score over 24 months when they graduate from being a student with a credit card to a first-time employee with a steady salary. New-to-credit customers also often have lower limits, which means utilization rates get higher, faster.

While there is more volatility among this market, the magnitude of the changes in credit scores may not be significant. However, lenders would be wise to monitor these customers more frequently and adapt their strategies accordingly.

3. New-to-credit consumers are younger
This is true; however, many are older than you may expect, as shown in the graph below.

In fact, almost 30% of new-to-credit consumers are over 35. We believe a significant proportion of them are new to Canada.

4. New-to-credit consumers have a worse credit performance
Well, in some ways they do, but this is not as straightforward a fact as you might think. New-to-credit consumers are segmented into two groups:

New to Market: Credit inexperienced, aged 18–24 at start of bureau record
New to Canada: Credit experienced, aged 25+ at start of bureau record

While these segments have certain overlapping qualities, they are at different stages of their credit lifecycle. New-to-market consumers could have a worse credit performance, but this is likely because of their life stage: younger consumers are just starting out on their credit journey and they may earn a lower income. They are still building their credit history and could be a viable candidate for future products.

On the other hand you have new-to-Canada consumers who actually perform better than established consumers in the near-prime tier, they just don’t have a credit history in Canada to back that up. In fact, new-to-Canada customers behave more like established customers when compared to younger, new-to-market customers. Identifying the sub-segment of consumers new to Canada beyond initial account opening is therefore essential if lenders wish to capitalize on the lower-risk, faster growing value offered by this segment.

5. New-to-credit consumers have unique credit needs
Yes, they do. On average, younger consumers are looking for credit cards, mobile phones and student loan consolidation whereas older consumers are looking at building a broader credit portfolio:

These different credit needs may not be covered in a lender’s broader customer management approach. While the new-to-credit market clearly presents significant opportunities for lenders in Canada, what’s equally clear is that different strategies will need to come into play in order to maximize these opportunities.

Successfully monitoring new-to-credit customers can help lenders increase their limits to avoid losing customers to a competitor. Using event trigger programs and trended bureau data can help you identify when your customers are shopping, opening products, or migrating spend or balances to competitors and can assist in developing sub-segment strategies to address their specific needs, taking life-stage differences into account.