Reducing Suspicious Credit Card Writ-offs: Strategies for Lenders to Counteract Questionable Practices
In the second quarter of 2024, early default losses accounted for a substantial 73% of all irregular losses, with these losses in prime and above credit portfolios amounting to $175 million or 31% of the total early default charge-offs. This trend has been a cause for concern among risk managers, who are seeking strategies to identify and mitigate these irregular behaviours.
According to a recent analysis by TransUnion, the increase in early default charge-offs among prime and above credit portfolios can be attributed to several factors. These include elevated delinquency rates, persistent high costs and inflation, macroeconomic and financial market conditions such as inflationary pressures, tariff impacts, and market volatility, declining net worth of issuers, and emerging early signs of economic strain and uncertainties surrounding trade policies and national debt deficits.
To combat this issue, issuers and regulators are employing various strategies. These include the use of loss projection models that incorporate historical net charge-off behaviours as functions of macroeconomic factors and loan portfolio characteristics to anticipate and manage potential defaults. Credit risk managers are also using early warnings and stress testing methodologies to detect early default risks and irregular borrower behaviour, enabling proactive risk mitigation before charge-offs accelerate.
Monitoring delinquency trends and integrating this data with economic signals to adjust credit underwriting and portfolio management strategies dynamically is another key strategy. Issuers are also refining credit screening and monitoring tools to better detect early signs of borrower distress, especially in prime segments where defaults are less expected, thus aiming to reduce surprise losses.
Layering on additional attributes can help issuers refine performance and surpass impressive results in detecting irregular behaviour. However, it's important to note that commercially available credit risk models are not effective at detecting fraudulent or irregular behaviours.
Carmen Williams, a senior advisor at TransUnion, emphasised the importance of these trends, stating, "The increase in early default charge-offs in prime and above credit portfolios is driven by persistent economic pressures and borrower stress despite their otherwise strong credit profiles."
Losses from early default charge-offs are a multi-billion-dollar issue, and as such, issuers are seeking strategies to limit their exposure from this growing threat. Models such as the one developed by TransUnion, along with other tools, can be used by lenders to reduce losses in the long term by identifying accounts with a high likelihood of displaying unexpected irregular fraud-like behaviours.
Credit card charge-offs reached record levels late last year, and early default losses have grown significantly between 2019 and 2023. As the economic landscape continues to evolve, it is crucial for issuers to stay vigilant and adapt their strategies accordingly to ensure the sustainability of their portfolios.
- In the realm of personal-finance and business, the surge in early default charge-offs, as recently analyzed by TransUnion, is linked to factors such as elevated delinquency rates, persistent high costs and inflation, macroeconomic conditions, declining net worth of issuers, and economic strain and uncertainties.
- To curb this trend, issuers are deploying strategies like using loss projection models that consider macroeconomic factors and loan portfolio characteristics, employing early warning systems for detecting early default risks, and dynamically adjusting credit underwriting and portfolio management strategies based on delinquency trends.
- As financial markets face escalating threats like cybersecurity risks and market volatility, it's crucial for investors to stay updated on these trends, and integrating economic signals with credit risk management can prove vital for minimizing losses and ensuring the long-term sustainability of portfolios.
