A new study developed by TransUnion finds that consumers with multiple account relationships with the same lender outperform consumers who maintain only one relationship with that lender, with the biggest improvements in delinquencies seen among mortgages.
The Chicago-based credit reporting firm looked at data from six super-regional financial institutions -- three banks and three credit unions -- each December from 2007 to 2009. Approximately 19 million consumers were included in each snapshot, and more than 400 million tradelines were evaluated in each time period. The study examined the correlation between the number of consumer accounts that were 30 days or more delinquent and the number of accounts the borrower held with the target lender.
In virtually all cases, delinquency levels on first mortgages, home equity lines of credit (HELOCs), credit cards, and auto loans decreased considerably as the total number of relationships the borrower had with a lender increased.
The most dramatic shift in delinquency was seen with first mortgages. In December of 2009, the study found that borrowers whose only credit relationship with their lender was for their mortgage had a 30-day or worse delinquency rate of 4.8 percent.
However, this delinquency level dropped 17 percent to 4 percent if the borrower had two relationships with the lender. That rate dropped further to 2.8 percent with
three relationships, 2.3 percent with four associations, and down to 1.9 percent with five or more relationships.
""Although the conventional wisdom has acknowledged the benefits of loyalty for years, this study is a major step in _quantifying_ that benefit and giving lenders the ability to incorporate that insight into lending strategy,"" said Ezra Becker, the author of the study and director of consulting and strategy in TransUnion's financial services business unit.
""As the economy recovers and lenders return to more active customer acquisition, our study gives clear, timely evidence of the value in lenders establishing multiple relationships with the same borrower,"" Becker continued. ""Our results go a long way toward easing the concerns some in the industry have voiced through the recession regarding customer concentration risk.""
Becker notes an important finding of the study is that the ""loyalty effect"" is seen across the spectrum of credit risk. He says loyalty cannot be captured by a traditional credit score. In fact, TransUnion found that the largest improvements in delinquency levels when looking at multiple credit accounts took place within the near-prime and subprime segments of the population.
Becker says this ""provides an avenue for extending credit to consumers who traditionally have constrained credit access but can yield quite profitable relationships for lenders.""
Another insight gained from the study is that the ""loyalty effect"" is generally resistant to recessionary pressures. For example, in 2007, auto loan delinquency dropped almost 48 percent between customers with one relationship and those with three relationships with a given lender. That difference in performance declined only marginally to 46 percent by the end of 2009, after the worst recession in recent times.
""Loyalty is built far more effectively in difficult times than in good times,"" Becker said. ""Consumers remember and appreciate those lenders that help them overcome a short-term liquidity crisis, or extend credit when others will not.""