An Interest Rate Rise Could be Far Less Widespread than Anticipated
CHICAGO, IL– September 21, 2016 — /Marketwired/ – New research from TransUnion (NYSE: TRU) found that up to 92 million credit-active consumers would experience some type of monthly debt service payment increase if the Federal Reserve Board raises interest rates by 25 basis points (0.25%).
However, the average monthly payment increase for these consumers would be a mere $6.45.
Only about 10% of these impacted consumers — or 9.3 million — will likely not have the capacity to absorb an increased monthly payment obligation arising from a Fed rate hike.
TransUnion found that up to 68% of credit-active consumers would experience some level of payment shock — a change in monthly payment obligations — from an interest rate increase. Consumers who are susceptible to a payment shock have one or more variable-rate credit products in their wallets, such as a credit card, home equity line of credit, or certain forms of mortgages and personal loans. TransUnion also analyzed historical payment behavior across each consumer’s credit wallet to assess whether that consumer could afford an increased monthly payment of any size.
“Ahead of a potential rate hike from the Federal Reserve, there is much speculation about the impact to consumers — and their lenders — from increased monthly payments,” said Nidhi Verma, senior director of research and consulting for TransUnion. “In theory, 137 million consumers could be exposed to a payment shock, but in fact not all of these consumers will be impacted. For instance, some consumers are transactors, i.e., they pay their balances in full each month. Some have an APR that cannot be further increased. Our data show there will indeed be an impact from potential interest rate rises, but it’s far less widespread than many anticipate. Most importantly, it can be identified at a consumer level based on our research.”
Impact of an Interest Rate Increase
|VantageScore® 3.0 Risk Tier*||Percentage of Consumers Impacted|
*Subprime (300-600), near prime (601-660), prime (661-720), prime plus (721-780), super prime (781+)
According to TransUnion’s study, while consumers across all risk tiers would experience an impact from the potential Fed interest rate hike, the impact varies. Consumers in the near prime risk tier (those with a VantageScore® 3.0 credit score between 601 and 660) had the largest share, with 82% of near prime consumers impacted from a potential rate increase.
TransUnion found that if the Federal Reserve increases interest rates by 25 basis points, 82% of impacted consumers would have a monthly payment shock of less than $10. The average change in monthly payment obligations would be just $6.45. “Most consumers have the financial capacity to absorb a seven dollar increase in their monthly payments, especially if they can plan ahead for the increased obligation,” added Verma.
Average “Payment Shock” to Consumers from Potential Interest Rate Hikes
|Monthly Payment Shock Amount|
|Interest Rate Increase||$1-$10||$10-25||$25-50||$50 or more|
|25 bps rise||82%||13%||4%||1%|
|50 bps rise||67%||21%||8%||4%|
|100 bps rise||46%||26%||16%||12%|
TransUnion used its CreditVision® aggregate excess payment (“AEP”) algorithm, which incorporates monthly payments from mortgages, credit cards and other debt obligations, to determine a consumer’s capacity to afford an increased monthly payment. With a 25 basis point rise in interest rates, 90% of exposed consumers can absorb their respective payment shocks. However, 9.3 million consumers do not appear to have the capacity to absorb a 25 basis point rise in interest rates.
“While it’s important to address the 9.3 million consumers who cannot absorb the payment shock, 90% of exposed consumers can afford their increased monthly payments,” said Verma. “However, if interest rates continue to rise progressively, more consumers might not be able to absorb the payment shock. Lenders should be mindful of which consumers in their portfolio are at risk from payment shocks, and use solutions such as AEP to identify these consumers and engage them appropriately.”
TransUnion’s study found that if interest rates rise by 100 basis points, an additional 2.5 million consumers might have a negative capacity to absorb their respective payment shocks. In total, 11.8 million consumers are estimated to be at risk of a negative capacity to absorb their increased payment obligations from a sudden 100 basis point rate increase.
“Fortunately, we believe it is highly unlikely the Fed will raise rates more than 25 basis points at any one time over the near term,” continued Verma. “This pace gives potentially impacted consumers an opportunity to adjust. In many cases, making minor changes to household spend would allow consumers to accommodate the payment shock.”
For more information on how the impact of a Fed interest rate hike might impact consumers, and how to use TransUnion’s CreditVision® aggregate excess payment algorithm to estimate the risk in your portfolio, visit here.