Larger Credit Card Payments Could Spell Higher Delinquencies for Subprime Auto Borrowers

While consumers who pay more than the minimum balance on their cards are typically less likely to default on their auto loans, that scenario plays out in the reverse for subprime borrowers. According to a study released today by TransUnion, subprime consumers who make higher credit card payments ended up being riskier auto loan borrowers.

“And I think there’s a good explanation for that,” said Antoni Guitart, right, director of research and consulting at TransUnion and coauthor of the study. “Most likely [as a subprime consumer], you’ve made a conscious choice that one of the obligations you’re going to pay this month is your credit card, possibly because you need access to that cash flow and liquidity that the card provides. And marginally, you’re going to be a little riskier because you’re choosing to pay your credit card rather than your auto loan.”

In the study, consumers are broken down into two categories: transactors, those who tend to pay their credit-card balances in full month to month; and revolvers, those who carry over some balance month to month.

“Not all revolvers are created equal,” Guitart explained. “Certain revolving behaviors might actually be riskier than others, like, for example, those revolvers who only pay the minimum on their credit card versus those that might be paying a multiple of the minimum payment. We’ve been able to quantify that behavior as well.”

TransUnion randomly sampled the performance of 12 million mortgage consumers, 17 million credit card consumers, and 22 million auto loan consumers in its consumer credit database, and evaluated their performance on these three segments.

Check out an infographic of the study below. 

While consumers who pay more than the minimum balance on their cards are typically less likely to default on their auto loans, that scenario plays out in the reverse for subprime borrowers. According to a study released today by TransUnion, subprime consumers who make higher credit card payments ended up being riskier auto loan borrowers.

“And I think there’s a good explanation for that,” said Antoni Guitart, right, director of research and consulting at TransUnion and coauthor of the study. “Most likely [as a subprime consumer], you’ve made a conscious choice that one of the obligations you’re going to pay this month is your credit card, possibly because you need access to that cash flow and liquidity that the card provides. And marginally, you’re going to be a little riskier because you’re choosing to pay your credit card rather than your auto loan.”

In the study, consumers are broken down into two categories: transactors, those who tend to pay their credit-card balances in full month to month; and revolvers, those who carry over some balance month to month.

“Not all revolvers are created equal,” Guitart explained. “Certain revolving behaviors might actually be riskier than others, like, for example, those revolvers who only pay the minimum on their credit card versus those that might be paying a multiple of the minimum payment. We’ve been able to quantify that behavior as well.”

TransUnion randomly sampled the performance of 12 million mortgage consumers, 17 million credit card consumers, and 22 million auto loan consumers in its consumer credit database, and evaluated their performance on these three segments.

Check out an infographic of the study below.