Banks are scaling back on lending to Americans with the lowest credit scores, according to a study from TransUnion.
Lenders processed fewer new personal loans, auto loans, and credit cards for subprime borrowers year-on-year in Q2 for the first time since 2012.
Lenders tightened their standards after the housing crisis a decade ago following several years of reckless lending to subprime borrowers. As the economy rebounded, they opened up access to the subprime part of the market. This new study shows that the trend is turning again.
But now is not a comparable time period to the financial crisis, said Ezra Becker, the senior vice president of research and consulting at TransUnion.
It would be alarming and a sign of another credit downturn if lenders pulled back on their underwriting and delinquencies still continued rising, Becker said. “Delinquency levels are still far below historical norms,” he told Business Insider.
This pullback “is a great illustration of the kind of job lenders do on a regular basis to evaluate their portfolios, take a look at their risks and opportunities, and find and maintain that balance point.”
Additionally, missed payments on subprime auto loans started to rise, and so the natural response was to pare lending in that segment.
Just like it doesn’t signal economic trouble, this change in the trend is not a reason for people with lower credit scores to be more concerned, Becker said. “Subprime consumers are always in recession,” he said. “And in fact, when recession hits the economy more broadly, they actually don’t see delinquency rates rise all that much because in the subprime space, they are already high.”
His guidance to subprime consumers was to strive to make their minimum payments every month, and not hesitate to let lenders know once they suspect there would be trouble paying.
The same goes for people with higher credit scores. “There’s never a time when consumers should not be aware of their credit scores and what drives those credit scores,” Becker said.