Credit Decisioning Data - User Guide and FAQ

In order to understand credit risk when lending to young, thin file borrowers, it is imperative to understand causation of those who become delinquent. The precipitating cause of the majority of delinquencies of persons under the age of 30 is a loss of employment. (For persons over 35 years, healthcare costs are the leading cause of delinquency) The typical millennial is employed, is in debt, and has little or no savings. They are living paycheck to paycheck. Because of their financial situation, a termination of employment will commonly set them on a default trajectory, beginning with student loans, which most young people are burdened by.

If they lose their job (not a quit, but an ‘involuntary separation’) they begin missing payments on debt obligations within 60 days of a job loss. They are actually fairly strategic in which bills they will stop paying. The first to go is always student debt. They’re done with college and there is no utility to be derived from paying on student loans. They’ll skip payments next on their highest balance credit cards, while preserving their cards with available credit. Car loans/leases are next as they need mobility to land a new job and then get to work each day. Last to go is the cell phone plan as it is their connection to the world. If a person is delinquent on their cell phone, the horse is out of the barn and their financial situation is dire.

Keep all of the aforementioned in mind when contemplating using ‘alternative data’ for signals of creditworthiness.

Any business person who is contemplating extending credit or has financial exposure to young, thin file borrowers

Great question, and there are 4 pieces of data we provide that help lenders make smart credit decisions:

1. Income – knowing the prospective borrowers income gives you the knowledge of whether they’ll have the cash flow to service the debt.
2. Probability of a job loss – we have analyzed credit patterns of millions of people with student debt. They pay their bills when they have a job. When they suffer a job loss, everything changes, and we know this empirically. Essentially, if a person can maintain their income stream, they can almost always meet their financial obligations.
3. FICO score – we include an estimated FICO score which is correlated with persons who have statistically similar employment and debt characteristics. We provide this FICO score so you can use it as a frame of reference to what you might typically use when assessing the creditworthiness of persons.
4. Income compared to expenditures, and savings – this is important in understanding the financial situation of most young people. Almost 60% of this cohort is deficit spending every month – they are literally going deeper and deeper into debt every year. We share this information with you so that you understand that a lower income person is probably underwater financially – even before you extend them credit. What eventually happens to these people? Many will slowly earn their way out of their predicament with wage increases. A significant percentage however are enabled by loose credit markets to continue taking on more debt and eventually, a large portion of their earnings is used to cover interest payments only on their debts.

Yes, very highly correlated. In fact, the majority of consumer delinquencies and defaults are attributed to persons in the lowest quartile of earnings and who have a moderate to high probability of job loss.

Primarily, borrowers aged 30 years or less. The results are applicable to older borrowers, though our model which is based upon analyzing younger persons is unique in that younger persons are far less established within the major credit bureaus’ systems. Furthermore, young persons typically don’t have much of a financial safety net.

The occupation of an individual contains a significant amount of information. This is due to the level of educational attainment required for most jobs now, and this is especially true as you move up the income strata. A nurse must have a nursing degree, likewise for an engineer, lawyer or accountant. The degree required to be employed in many fields is a signaling function which is highly correlated with the overall responsibility of individuals. Conversely, occupations that generally do not require specific education credentials, will also have lower pay and the workers in those occupations have higher layoff rates. As we have analyzed the borrowing patterns and creditworthiness of millions of students over the course of a decade, we have detailed insights relating to the occupations of young, thin file borrowers, and their ability to service their debts.