Are younger borrowers taking a different stance towards repayment? There’s certainly evidence that this is the case, as we discussed the FICO Forum: The New Normal held in London on 16th November.
In fact, there’s even a term for it: GRINCH refers to Generation Recognised in Need of Credit Help. This generation is under 35 and actively seeking credit. We first saw this term in the November 2010 Credit Action Debt Statistics for the UK, which referenced a Co-Operative Electrical survey. And as it’s the holiday season, the term appealed to us!
So how do GRINCH members behave differently? One change is in their payment hierarchy — the order in which they pay their bills. Traditionally, the hierarchy was 1) Housing payment; 2) Transportation payment; 3) Utilities including phone; 4) Unsecured debts like credit cards. Now we see many younger borrowers having a different hierarchy - 1) Unsecured debts; 2) Utilities; 3) Housing 4) Transportation.
Evidence from the US also shows that higher risk customers faced with a choice between credit card delinquency and mortgage delinquency will pay their credit card first. This behaviour is more exaggerated among younger borrowers but also true amongst other high risk borrowers. In the US, there has been the phenomenon of “strategic defaults” on mortgages, which is not yet observed much in Europe.
Why does the GRINCH pay differently? We believe it has a lot to do with perceived value and lifestyle for today’s younger borrowers:
- Cards in the US and UK have reward programmes that help explain their popularity. Also, for a generation raised on credit, living without a credit card may not be an option.
- Mobile phones are perhaps the most important part of the young lifestyle — again, living without is not an option!
- Housing price acceleration in these markets may also mean participation of fewer young borrowers in mortgage borrowing.
Signs of this trend have been evident for some time. But it has gotten more focus in the recession as more consumers struggle to make payments further down the hierarchy.
What does it mean for lenders? Know your customer. Identifying their credit patterns and likely behavior is a must if you want the GRINCH to pay you on time.