January 12, 2024
The Effects of Credit Score Migration on Subprime Auto Loan and Credit Card Delinquencies
John Driscoll, Jessica Flagg, Bradley Katcher, and Kamila Sommer1
Introduction
In the early stages of the pandemic, income support and forbearance programs led consumer loan delinquency rates to fall to near-record lows for borrowers across the credit score distribution. Since the second half of 2021, however, delinquency rates have risen, and by 2023:Q3, overall rates for auto and credit card loans had exceeded their pre-pandemic levels. Delinquency rates for borrowers with subprime credit scores rose even more significantly, and the rate for subprime auto loans in 2023:Q3 was at its highest level since 2000.
In this note, we show that the very large increases in subprime delinquency rates are in large part driven by pandemic-era shifts in the credit score distribution, or upward “credit score migration.” Over the course of the pandemic, many consumers saw an in increase their credit scores sufficient to move out of the subprime category, and the share of borrowers with subprime scores decreased to the lowest level seen since the late 1990s. We provide counterfactual calculations that hold borrowers’ credit scores at their 2019:Q4 levels to show how much the upward migration in scores has contributed to the sharp rise in the subprime delinquency rate. We find that counterfactual subprime delinquency rates were both considerably lower and have shown more muted increases. Thus, the historically high delinquency rates for auto loans to subprime borrowers overstates to an important extent the overall stress among borrowers more broadly.
While our analysis highlights the important quantitative role that credit score migration has had in the recent behavior of subprime delinquency rates, our counterfactual simulations are not intended to create an alternative, “true”, subprime delinquency rate. Instead, they are designed to highlight the important role of credit score migration in the dynamics of the subprime delinquency rate in recent data. The subprime rate is inherently affected by migration of borrowers across credit score category and, over longer horizons, delinquencies and defaults could lead to credit score downgrades and move borrowers into the subprime credit one. Moreover, this analysis should not be read as suggesting that delinquency rates could not exhibit further deterioration over coming quarters.
Data
We use data from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax (hereafter CCP). This is a nationally representative dataset that contains credit reporting data for a random and anonymized, five percent sample of the population with credit histories. In the following discussion we define subprime as those borrowers with Equifax Risk Scores of less than 620, near prime as those with scores between 620 and 719, and prime as those with scores greater than 720.2
Results
We first discuss the evolution of credit score distributions over time, and then spell out the implications for delinquency rates. As shown in Figure 1, the share of consumers with subprime credit scores has been falling since the end of the Global Financial Crisis, possibly owing to the substantial amount of household deleveraging amid tighter loan underwriting standards (Figure 1). Goodman et. al (2021) documented that this decline accelerated starting in 2020, largely driven by COVID-19 relief policies such as the Coronavirus Aid, Relief and Economic Security Act’s forbearance provisions. Over the course of the pandemic, the share of borrowers with subprime scores fell from about 23 to 18 percent, with most of the increase in shares coming in the prime category. Partly as a result, the shares of subprime auto loan balances fell from about 20 to 17 percent, while the share of subprime credit card balances declined from about 9 to 8.5 percent.
