The economic disruptions caused by the pandemic created unprecedented challenges for credit card issuers, regulators, and consumers alike. Payment holidays and account forbearance programs helped many cardholders navigate periods of financial uncertainty, but these temporary measures also masked underlying credit risk. As these programs expire, issuers face the difficult task of assessing the long-term impact on portfolio performance and preparing for potential increases in delinquencies and charge-offs.
To navigate this evolving environment, card issuers must refine their credit risk management strategies and look beyond traditional scoring models. By incorporating additional account behavior metrics, reassessing loss reserve assumptions, and improving forecasting capabilities, institutions can better identify emerging risks and position themselves for a changing credit cycle.
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Data for today’s episode is provided by Mercator Advisory Group’s Viewpoint: Credit Card Account Forbearance: Not Forgiveness and Not Forever
Advice for Card Issuers: Wait, Watch, Be Real
- The pandemic’s impact will continue for years, and issuers must prepare for the eventuality of heightened write-offs.
Mercator recommends the following for card issuers:
- Expect scoring models to be less reflective of risk and use other metrics to validate scoring models.
- Metrics such as line utilization, geographic location, account vintage, and cash advance usage can help filter collection account models.
- Conduct research to understand the likely long-term hardship accounts’ performance using account monitoring and cardholder contact data.
- Update loss reserve assumptions, payment plan policies for hardship accounts and new account target marketing accordingly.
- Adapt forecasting models to segment account behavior based on COVID’s impact and weak credit performance.
About Report
Payment holidays helped consumers get through unexpected credit risk during the pandemic, but before long it will be time to pay the piper. Suppressed delinquency volume makes risk appear under control, but the day of reckoning will soon be at hand.
COVID’s sudden grip on cardholders disrupted household budgets worldwide. Countermeasures supported by consumer protection agencies allowed for payment holidays, but sooner or later the industry will need to contend with a disrupted credit cycle. Issuers must be prepared for the upcoming storm.
