Have you ever looked at the labels on junk food? Me neither. We know it’s not great for us but it tastes great! It can be an escape or perhaps it is a reward. Despite consumers having the knowledge to make better food choices, this industry thrives. Credit awareness and usage is much the same. The impacts of small, daily decisions of consumers can make or break future credit opportunities.
There is a growing body of evidence that people who are more financially literate are not necessarily more financially resilient. Note that resilience doesn’t necessarily mean being “rich” but being able to handle unexpected events. In fact, many studies find that all that financial (or nutritional) literacy does is improve people’s intentions. It doesn’t necessarily improve their actions.
To help inform Canadians on consumer credit, Julie Kuzmic is the Director of Consumer Advocacy at Equifax Canada. This is an important role focused on helping people feel more confident around their financial decisions associated with credit. There’s a huge need – and opportunity – to help Canadians understand how credit works. This is due to the fact credit and credit scores play an important part in our overall financial well being. There are also new opportunities to better understand potential consumers.
Leveraging Credit Segmentation
Segmentation is certainly not a new concept when it comes to business, Julie notes. But what might be evolving is the type of information that you can get – or generate – about your customer. In order to effectively connect to that individual and their circumstances, Julie reminds us that credit bureaus can provide new insight.
There are a number of regulatory requirements around accessing people’s credit information, such as consent and ensuring the use of the credit information is permitted under the applicable law. Accessing full credit information without meeting the regulatory requirements is not allowed, no matter how much a company may be willing to pay. However, when the regulatory requirements are met, the use of credit information can be ongoing. Many organizations leverage this opportunity to augment their segmentation further. Julie sees this particularly in financial services. Many FIs obtain consent from their customers to monitor their credit on an ongoing basis.
There are a number of inferences based on high-level, anonymized data that can be shared from credit bureaus.
Gaining a better understanding of a customer’s current life priorities can help enhance segmentation models. Perhaps a customer is opening up new credit cards or buying a home for the first time. Their credit needs may be changing, and gaining a fuller picture can help tailor services with consumer wants and needs. Julie suggests you can then make some inferences about life stages or priorities at that point. Then, you can use some of those inputs for segmentation models.
Segmentation in a ‘K-Shaped’ Recovery
As a result of an uneven recovery from the COVID-induced recession, Julie thinks it might require bringing a different lens to any segmentation approach. Geographic and demographic based segmentation isn’t anything new. Certain areas may find it a longer recovery than others. For example, Alberta was already showing signs of strain due to fluctuating oil prices and economic stress before COVID. Higher deferral rates there by consumers for mortgages and other types of credit during the pandemic are an important clue. And also, how the economy is doing in Alberta. That’s a particular area of concern.
Previously, credit grantors may not have put in a segmentation layer of the economic conditions of a particular region. Julie suggests this should be reconsidered.
Perhaps the people who live around Banff, for example, would expect that a lot of income in that area is based on the tourism sector. We know that this sector could be one of the slowest to rebound. So, what does that mean in terms of the types of products that the people in that area are going to be prioritizing? Versus the people living in Toronto who were able to switch to work from home and have actually seen their take home income increase? These urban dwellers are likely ahead because of reduced costs, e.g. not paying for a gym membership, transportation to get to the office, and so on.
Credit Scores And Why They Matter
The whole point of a credit score, Julie advises, is to predict the likelihood that somebody will pay their bills on time. People who have paid bills on time in the past tend to continue paying bills on time. So an individual’s payment history often accounts for a large fraction of the overall credit scoring equation.
When predicting future payment behaviour from credit files, one of the critical elements is past behaviour.
Julie highlights there are other elements important to credit scores, such as the amount of available credit that is currently being used (called utilization).
Another factor in the credit scoring calculation is the amount of credit that has been recently applied for. Julie reminds us that’s strictly in terms of the number of times you’ve applied for credit in the last one to three years. Many of the newer credit scoring algorithms will group together multiple mortgage or car loan applications as a single shopping event since someone who has recently applied for several car loans or mortgages is most likely shopping around for a single car or property.
There’s no secret to improving your credit score. There’s no gaming the system if you missed some payments.
Julie reminds us that the most important action to achieve and maintain a good credit score is to regularly make your payments on time. That’s what a score is trying to predict. So do the behaviour that the score is trying to predict more often and your score does tend to come out pretty well.
How the COVID Response Impacts Credit
Interestingly, we’ve seen a huge drop in delinquency – meaning people paying their bills late. And that’s not terribly surprising, Julie notes, given all the government support that has been available to people.
There has been a staggering reduction in the number of people declaring bankruptcy in 2020 due to CERB and other support mechanisms like payment deferrals.
In addition, bankruptcy courts have been closed which is partly why the expected skyrocketing of bankruptcies hasn’t happened yet. Julie shares that probably will happen but it’ll be delayed. She sees the same thing with delinquencies. Once people no longer have the benefit of CERB, they are going to have to deal with accumulating bills.
Growth is still possible through better understanding of the consumers’ circumstances and more effective segmentation.
Finally, another interesting insight is that the average limit for new newly-opened accounts. Specifically, when you open a credit card, the bank will give you a credit limit on that card. The credit limit average has fallen to levels that we haven’t seen for more than a decade. So people who are opening new credit cards are being given much lower credit limits than a year ago. Time will tell, but perhaps that may make Canadians more aware and responsible with their credit usage. If that’s the case, we’ll see a healthier household balance sheet and overall economy. Maybe we’ll even skip past the junk food aisle the next time we shop.
In Partnership With
Julie Kuzmic is the Director of Consumer Advocacy at Equifax Canada and is a recognized authority on consumer credit. In her role, Julie helps Canadians build credit confidence. Julie’s live media appearances include BNN Bloomberg TV plus several radio and podcast interviews. She has written popular articles on credit for MoneySense and is quoted by The Globe and Mail, HuffPost, Bloomberg News, Financial Post, CBC and Narcity.
Tim Bishop, CM is a multi-disciplined executive with a proven record of optimizing strategic efforts to expand the influence of leading organizations, such as the Canadian Marketing Association, Cineplex Entertainment, Lavalife.com, IMI International and Northstar Research Partners. In Partnership With is his latest focus to curate Canadian marketing experts to celebrate the power of strategic partnerships in a perspective-based content series.