Opinion: How Student Loans and Inflation Are Reshaping Credit Risk

Consumers are facing a very different and challenging financial climate today. Money decisions can be cringe inducing. 

That means credit issuers need to remain cognizant of the customer experience and tread carefully as they navigate these conditions. Not only do issuers have to keep their eye on the ball, they have to get much closer to the action. 

That includes closer monitoring of credit utilization as well as being cautious about how much credit they extend to consumers. Realistic assessments of risk need to be factored into pricing. 

Just as consumers should have emergency funds, issuers need to be building up their own reserves to be ready for possible charge-offs. 

Americans value the ability to choose their own financial priorities and decisions. But a number of increasing economic pressures are now driving financial decisions in ways that look very different from even a few years ago when the rules were adjusted during the COVID pandemic. 

I remember a time not so long ago, when I was a business news anchor at Thomson Reuters, and I complained to a friend that all my reports about the Federal Open Market Committee (FOMC) meetings were the same.

I could not think of anything new to say when the Fed met and made decisions about interest rates. It was like groundhog day — same lines over and over. Interest rates remained at or near zero. They will keep monitoring the economic data. It was so boring! 

Inflation was safely in check and prices were relatively stable. Mortgage rates made homes accessible, and if you had a mortgage rate that was too high, it was reasonable to just refinance at a lower rate.

Rising prices, high interest rates, and student loan debt has shifted the credit landscape, raising risk in subprime tiers.

When the pandemic came, student loan payments were put on pause. Americans were able to pay down other debts, and be intentional and strategic about how they used credit. 

Fast forward to the current macro economic environment and while things are much more interesting, I am now more than a bit nostalgic about the much less complicated past. Boring looks pretty good these days. 

Recent data from FICO showed credit scores on the decline. Consumers are using more of their available credit, and missing more payments. Inflation is making life much more expensive. Consumers are borrowing more money and paying it down more slowly. 

Their priorities are shifting as well. Higher on the list are nonnegotiables like car payments — perhaps because of the push to return to the office and the need to get to work. Keeping a roof over their head remains a priority as well in the payment hierarchy. Last on the list: student loans. 

Despite the early warnings that student loan payments were really being reinstated, the many delays and false starts created a period of denial for borrowers. Now that student loan payments have resumed, and are counted in credit scores, reality has set in with a vengeance.

Younger borrowers are a particularly risky segment in this environment: They have thinner credit reports, and more student debt. Many live in higher cost areas and face even sharper rising costs of living that compete for their dollars when it comes to paying their credit card bills. 

The decline in the FICO report may appear modest: The average score is now at 715, down from 717.  But there are nuances in the numbers that credit card issuers must pay attention to sooner rather than later.

According to the report, the middle score range shrank to only 38%. That’s because more consumers moved into both the highest and lowest score brackets. This is a warning sign about the rising risk in the subprime segment. When payments are late or missed, it can be the start of an alarming downward spiral with accelerating losses.

Communication is essential when it comes to delinquency management. Being in touch with consumers who show even the earliest signs of financial stress is the ultimate insurance in this uncertain and always evolving economic period.