It pays to watch FICO Scores, when you book new accounts and manage the credit cycle. Here is a case in point with the Goldman Sachs Apple credit card. Adding new accounts requires that credit card issuers calibrate their loan approval models to risk. As top issuers like Bank of America, Citi, Chase, and Wells know from decades in the card business, you just can not approve accounts and hope for the best. The devil is in the details, as they say.
CNBC called it a “surprising subprime problem.” I would toss out the surprising part of the phrase and say that is what happens when you dig deeply into the bowels of credit scores. Go beneath the 720 FICO Score band, and you will find receptive new customers, but they are often the first to feel the pain of an economic downturn.
And here we are. Savings rates are slipping, home equity rates are dipping, and those 401k gains are at risk. To make matters worse, interest rates are surging, and inflation is unsustainable for the consumer household budget. As fintech consumer lenders learned recently, we are looking at the perfect credit storm.
Now come the numbers.
- Goldman’s loss rate on credit card loans is the worst among big U.S. card issuers and “well above subprime lenders” at 2.93%, according to a Sept. 6 note from JPMorgan.
- More than a quarter of Goldman’s card loans have gone to customers with FICO scores below 660, according to company filings. That could expose the bank to higher losses if the economy experiences a downturn, as is expected by many forecasters.
- While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That is the worst among big U.S. card issuers and “well above subprime lenders,” according to a Sept. 6 note from JPMorgan.
- The profile of Goldman’s card customers resembles that of issuers known for their subprime offerings. More than a quarter of Goldman’s card loans have gone to customers with FICO scores below 660, according to filings. That could expose the bank to higher losses if the economy experiences a downturn, as is expected by many forecasters.
The whole purpose of the credit score is to risk rank consumers. You can use the score at the acquisition point, and you can use the same score as the account matures through the credit cycle. If you securitize credit card assets, well, there as another use case, and nearly all top issuers use the score. One large issuer who recently shifted away from the FICO Score in their asset-backed securitizations is now feeling the credit risk pain, as Seeking Alpha points out about Synchrony:
- The delinquency rate was 2.9% in July, rising from 2.7% in June and from 2.1% in July 2021; both months are still strong when compared with 4.5% level in February 2020, before COVID-19 hit. The adjusted net charge-off rate of 3.0% rose from 2.7% in June and from 2.2% in July 2021.
Sure, the Apple card is a good product. Shiny white card. Daily reward payouts, but credit scores matter. You can read about that fact here.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
