Homeownership dreams loom large among the younger set
TransUnion, on Wednesday, released a first-of-its-kind study showing the breadth of consumers applying for credit for the first time toward the aim of gaining access to traditional lending products such as mortgages.
Empowering Credit Inclusion: A Deeper Perspective on New-To-Credit Consumers shows that in the US, 5.8 million consumers opened their first credit product and became new to credit (NTC) during 2021. Another three million became NTC through the first half of 2022, the research showed.
Charlie Wise (pictured), co-author of the study and head of global research at TransUnion, spoke to Mortgage Professional America at length about the study.
The kids are all right in terms of credit risk
One key finding of the study was that NTC consumers – those early in their credit journey – generally perform as well or better than borrowers with established credit and similar risk scores. TransUnion researchers posited the finding as added assurance for lenders to expand credit to such consumers without incurring materially higher delinquencies.
Wise acknowledged he found the finding a bit surprising: “It was surprising because the conventional wisdom is that consumers who are younger, consumers who are less experienced with credit, might have more difficulty in managing credit,” he said. “Credit, quite frankly, is a muscle you build up over time around the importance of timely payments, budgeting, financial management, and all that stuff that you build up over time. New-to-credit consumers are, by and large, younger; they are, by definition, less experienced in managing credit. So we would have expected to see some stumbles coming out of the gate for those consumers when they’re first entering.”
Lenders, take note
He stressed the importance of the finding as it relates to lenders: “The more consumers who can participate in credit markets in a region, the greater the opportunities for broad economic inclusion. The data from our study demonstrate that new-to-credit consumers are often good risks who are hungry for credit and will show loyalty to those financial institutions that offer them their first credit accounts.”
The study suggests lenders might rethink their collective approach to expanding credit in light of the finding: “Many banks and lenders spend considerable time and money attracting new customers,” the study concluded. “However much of that effort is often directed at consumers who already have experience and demonstrated track records with credit. But there are significant lifetime loyalty benefits to being the organization that gives a consumer their first credit product.”
The paradigm in terms of focus could use some tweaking: “Developing a strategy to attract and build relationships with NTC consumers and help them along their credit journeys can create a base of loyal customers who will become increasingly profitable as their needs and financial capacities continue to grow.”
Gen Z comprises biggest NTC demographic
The study also found consumers in the Gen Z age range – those born from the mid-1990s and mid-2010 – represented the largest part of the NTC group, with 59%, followed by Millennials at 21%, Gen X at 12%, and Baby Boomers at 7%.
The impetus for the study explained
“One of the core pieces of our mission strategy is to increase credit inclusion and business opportunities,” Wise said in explaining what prompted the study to be undertaken “We really are looking for ways that we can get more consumers – not just in the US but throughout the markets around the globe that we serve – able to take advantage of credit to essentially improve their lives and have access to financial mobility.”
Dreams of eventual homeownership figure prominently
The American Dream of homeownership looms large in the minds of the NTC segment, Wise suggested: “Credit is important in purchasing a home and building long-term wealth or using credit to fund-starting a small business or household formation. All these things are really critical.”
One survey question showed how sought after mortgages are to those new to credit. “What credit products do you feel you don’t have access to?” the survey asked. The top item sought was mortgage, representing 32% of responses. “It demonstrates that for a lot of the NTC consumers, that’s a goal,” Wise said. “That’s something they want but they don’t feel they’re there yet. But they’re early in that journey.”