New users better at managing credit – study

New users seem to be better at managing credit in South Africa and globally, which offers some assurance to lenders in developed and developing credit markets that they can extend additional credit products to them without incurring materially higher delinquencies.

According to a newly released TransUnion global study, Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers, new-to-credit consumers who are just starting their credit journeys generally perform as well or better than borrowers with established credit and similar risk scores.

This study included data and insights about millions of consumers in different global markets, including South Africa, Brazil, Canada, Colombia, the Dominican Republic, Hong Kong, India, the Philippines and the United States.

TransUnion defines a new-to-credit consumer as someone with no prior credit history who opened a first-ever, traditional credit product, such as a vehicle finance loan, credit card or another product unique to individual regions. The study examined their behaviour and performance over the subsequent two years. 

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Credit inclusion

“A particular focus around the topic of financial inclusion is credit inclusion or consumers ability to access traditional lending products, such as credit cards, home loans and personal loans. These products serve as a means to financial mobility and can be a gateway to a better quality of life, enabling homeownership, business formation and wealth creation,” says Weihan Sun, director of financial services research and consulting at TransUnion Africa.

“The more consumers can participate in credit markets in a region, the greater the opportunities for broad economic inclusion. The data from our study demonstrates that new-to-credit consumers are often good risks as they are hungry for credit and will be loyal to financial institutions that offer them their first credit accounts.”

Almost 750 000 South African consumers opened their first credit product and became new-to-credit during 2021. In 2022, the country surpassed that number by the end of November and ended the year at over 810 000 NTC consumers, up 8.2% from the year before.

Sun says in 2021, the largest part of this group consisted of Gen Z at 57%, followed by Millennials (28%), Gen X (9%) and Baby Boomers (6%). One of the main takeaways from the study is that NTC consumers around the globe are generally good risks when compared to other established borrowers with similar credit risk profiles.

Locally, these new credit consumers usually go for clothing accounts first, with 58% opting for this, while 13% chose to start their credit journey with a non-bank personal loan.

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Managing credit

The study also examined their credit performance by looking at NTC consumers who opened credit cards as a subsequent product over their initial two-year journey and the delinquency performance after six months before comparing their performance to the delinquency rate of credit-served consumers who also opened cards during the same time.

Interestingly, the study found in the near prime and prime score bands where many NTC consumers fall early in their credit journeys, the delinquency rate for NTC consumers was comparable to, or even better than, that of more established credit-served consumers. This trend was picked up before and during the pandemic.

NTC borrowers had lower delinquency rates on new credit cards than established borrowers in nearly every region, depending on risk tier or time period of origination and in South Africa they had slightly lower delinquency rates than credit-served consumers in the same subprime and near prime score ranges.

In addition, TransUnion also conducted a survey-based market research study to understand the voice of NTC consumers, which included responses from 8 465 NTC consumers from a range of markets, including South Africa, Brazil, Canada, Colombia, Dominican Republic, India, Philippines and the United States.

It was interesting that 40% of the South African respondents said that having more education on the availability and benefits of credit would make them more likely to expand their use of credit products.

“Lenders should invest in credit education to promote financial literacy for consumers and equip them with the insights and knowledge on the products they are taking on to manage their credit exposure effectively. This can help prevent borrowers from defaulting and will highlight the significant impact that defaulting behaviour has on an individuals’ credit score.”

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Why new users opted for credit

According to the survey, most South African consumers (45%) said they opted for credit due to a new expense, followed closely by starting to live on their own (40%).

In South Africa, 58% of new-to-credit consumers chose a clothing account as their first credit product, followed by non-bank personal loans (13%), and retail instalment loans (10%), which aligns closely with their stated reasons for entering the credit market.

In South Africa, 61% of NTC borrowers reported receiving a credit product from the first institution where they applied. 

The study also found that convenience is key for NTC borrowers and that they choose the first lending institution based on convenience (31%), while 22% chose a lender where they already banked to open their first credit product.

About six in ten NTC consumers said their need for credit will increase in the next three to five years, with the highest levels in developing markets, led by India at 79%) Approximately 60% of South African NTC consumers said their need for credit will rise in this same timeframe.

“It is clear that new-to-credit borrowers around the globe and in South Africa will play a large role in the growth of many lenders’ books of business. Banks and other financial institutions that use alternative data to assess emerging consumers’ risk, while providing products, channels and a positive onboarding process, will likely be the ones who succeed in building loyalty with this important segment of the population,” Sun says.