From the beginnings of General Motors Acceptance Corporation to the introduction of the Diner’s Club charge card, the history of credit has been filled with game-changing innovations.
Today, new innovations in tech are continuing to shape the consumer credit industry – and with U.S. consumer debt sitting at $13 trillion, these changes could play a role in impacting how consumers access credit both today and in the future.
The Modern Credit Landscape
Today’s infographic comes to us from Equifax, and it gives a snapshot of modern credit as well as a perspective on how new technologies such as trended and alternative data are changing the landscape.
It’s the second part of our ongoing three-part series on credit:
Credit scores play a massive component of consumer life, and they are used to gauge creditworthiness for big purchases ranging from homes to launching a business.
Interestingly, how this scoring works is not at all static – and new technology is being applied to increase accuracy as well as open credit up to more consumers throughout society.
Traditional Credit Scoring
The modern numeric credit score emerged in 1989, and it uses logistic regression to make informed decisions on a consumer’s creditworthiness.
The scoring model is made up of five distinct categories:
|Payment History||35%||Are scheduled payments made on time?|
|Debt Burden||30%||Includes multiple factors such as number of accounts with balances, amounts owed, and debt-to-limit ratio.|
|Length of Credit History||15%||Average age of accounts and age of oldest account.|
|Types of Credit Used||10%||What type of credit is used? (i.e. revolving, installments, etc.)|
|New Credit Requests||10%||Hard new credit inquiries can hurt scores.|
But this model does have its limitations. For example, traditional credit scores give a snapshot of credit rather than showing how the “big picture” of a person’s credit is changing. Further, current scores can also can be inhibited by a lack of data, resulting in an inaccurate representation of a person’s credit.
Tech to the Rescue
On a global basis, the data universe is doubling every two years – and this abundant new resource is revolutionizing consumer credit.
Instead of looking at a snapshot of a credit score, it’s possible to analyze the direction, velocity, tipping points, and magnitude of changes in a consumer’s credit history to get a bigger, more accurate picture. This is called trended data, and it can offer up to 20% improvement in predictive performance.
Credit history is important, but there are increasingly other sources of data that can provide a view of a consumer’s creditworthiness. Alternative data taps into information on property ownership, wealth, how customers pay everyday bills, and other data sources to provide a more well-rounded picture.
Technology has given consumers unprecedented access to their credit data – and in the meantime, new science behind neural networks is being implemented to give even more sophisticated scoring capabilities.
Visualized: U.S. Corporate Bankruptcies On the Rise
In 2023, over 400 companies have folded. This graphic shows how corporate bankruptcies are growing at the second-fastest rate since 2010.
Visualized: U.S. Corporate Bankruptcies on the Rise
In March, Silicon Valley Bank collapsed, plunging its parent company SVB Financial Group into bankruptcy a week later.
While many expected a wave of bank failures to follow, much of this has since been averted—but cracks have begun to emerge with Moody’s recent downgrading of 10 small and mid-sized banks.
Across the wider corporate landscape, bankruptcies have begun to tick higher. Overstretched balance sheets coupled with 11 interest rate hikes since last year have added to mounting challenges for companies across many sectors.
This graphic shows the surge in corporate bankruptcies in 2023 based on data from S&P Global.
U.S. Corporate Bankruptcies Grow
So far in 2023, over 400 corporations have gone under. Corporate bankruptcies are rising at the fastest pace since 2010 (barring the pandemic), and are double the level seen this time last year.
Below, we show trends in corporate casualties with data as of July 31, 2023:
|Year of Filing||Bankruptcy Filings|
as of July
Represents public or private companies with public debt where either assets or liabilities are greater than or equal to $2 million, or private companies where assets or liabilities are greater than or equal to $10 million at time of bankruptcy.
Firms in the consumer discretionary and industrial sectors have seen the most bankruptcies, based on available data. Historically, both sectors carry significant debt on their balance sheets compared to other sectors, putting them at higher risk in a rising rate environment.
Overall, U.S. corporate interest costs have increased 22% annually compared to the first quarter of 2021. These additional costs, combined with higher wages, energy, and materials, among others, mean that companies may be under greater pressure to cut costs, restructure their debt, or in the worst case, fold.
This year, 16 companies with over $1 billion in liabilities have filed for bankruptcy. Among the most notable are retail chain Bed Bath & Beyond and the parent company of Silicon Valley Bank.
|Party City||Consumer Discretionary||Jan 2023|
|Serta Simmons Bedding||Consumer Discretionary||Jan 2023|
|Avaya||Information Technology||Feb 2023|
|Diamond Sports||Communication Services||Mar 2023|
|SVB Financial||Financials||Mar 2023|
|LTL Management||N/A||Apr 2023|
|Bed Bath & Beyond||Consumer Discretionary||Apr 2023|
|Whittaker, Clark & Daniels||N/A||Apr 2023|
|Kidde-Fenwal||Consumer Discretionary||May 2023|
|Envision Healthcare||Healthcare||May 2023|
|Wesco Aircraft||Industrials||Jun 2023|
|PGX Holdings||Industrials||Jun 2023|
|Cyxtera||Information Technology||Jun 2023|
|Voyager Aviation||Industrials||Jul 2023|
Mattress giant Serta Simmons filed for bankruptcy early this year. It once made up nearly 20% of bedding sales in America. With a vast share of debt coming due this year, the company was unable to make payments due to higher borrowing costs.
What Comes Next?
In many ways, U.S. corporations have been resilient despite the sharp rise in borrowing costs and economic uncertainty.
This can be explained in part by stronger than anticipated profits seen in 2022. While some companies have cut costs, others have hiked prices in an inflationary environment, creating buffers for rising interest payments. Still, S&P 500 earnings have begun to slow this year, falling over 5% in the second quarter compared to last year.
Secondly, the structure of corporate debt is much different than before the global financial crash. Many companies locked in fixed-rate debt over longer periods after the crisis. Today, roughly 72% of rated U.S. corporate debt has fixed rates.
At the same time, banks are getting more creative with their lending structures when companies get into trouble. There has been a record “extend and amend” activity for certain types of corporate bonds. This debt restructuring is enabling companies to keep operating.
The bad news is that corporate debt swelled during the pandemic, and eventually this debt will come due likely at much higher costs and with more severe consequences.
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