No matter what type of default, the risks are high
No matter what type of default, the risks are still high
Auckland, 1 August 2006 - New research shows that consumers who default on low value amounts (below $500) and/or on non-bank credit are a higher risk of defaulting on larger amounts and traditional credit types. This dispels a common presumption on which consumer credit is currently assessed and granted in New Zealand. The research, from the Dun &Bradstreet (D&B) Consumer Credit Bureau, sought to examine a strong perception that low value or non-bank defaults should not be considered of the same importance as high value or bank defaults when assessing credit applications and risk.
D&B’s research, focused on telecommunications debt in New Zealand and Australia, resulted in two key findings:
- Consumers with telecommunications only defaults are a higher risk than all other default categories; and
- Consumers defaulting on amounts less than $500 are more likely to default on any value credit line in the next 12 to 24 months.
D&B New Zealand General Manager, John Scott, believes the new research is an important tool in ensuring credit providers of all types are better able to assess risk and make decisions that don’t result in consumers being provided with access to credit that they may not be able to manage. “There is a view that defaults on a small amount or on a non-bank loan, such as utility bills, should not be assessed by future lenders in the same way as defaults on large amounts or bank loans should be”, said Mr. Scott.
“The perception driving this view is that consumers take their large value and traditional bank loans, like mortgages and personal loans, more seriously than other types of debt and while they may be prepared to ignore a small phone bill of a few hundred dollars, they would never get into trouble on something as important as their mortgage or car loan.
“However, the D&B research debunks this perception and demonstrates that not only should all defaults be considered when assessing risk but that in fact strong consideration should be given to both low value and non-bank credit.”
The research identified that consumers with a telecommunications-only default were a higher risk than consumers with only one default of any other type. When assessing credit applications where only telecommunications defaults were involved, there were 3.8 good applicants for every one bad applicant. In comparison, there were 4.1 good applicants for every one bad applicant when one default of any other type was involved. It was also identified that consumers with a default on values less than $500 were a higher risk than consumers with a default on higher value loans.
Applicants who had defaulted on a value less than $500 were 3.1 times more likely to default over the next 12 to 24 months on any other credit application, regardless of value, than consumers who had previously defaulted on amounts over $500.
“This research is critical for both lenders and borrowers”, said Mr. Scott.
“For lenders, it demonstrates that a broader consideration of risk should be applied to future applications regardless of category and dollar value. Such an approach can minimise financial risk and also allow institutions to make decisions that can help to ensure some consumers don’t fall into a bad debt cycle.
“For consumers the message is also clear. Take all of your credit commitments seriously and understand the damage not paying a small bill, like a phone or power bill, can have on your future capacity to access credit.”
D&B has been able to produce this research because of its unique Consumer Credit Bureau approach which allows for analysis of utilities data in addition to traditional and bank data relied on by credit bureaus in the past.