It's Not Rocket Science: An Increase in Late Payments Leads to a Decrease in New Accounts

Experian Consumer Direct released the results of a consumer credit and borrowing study this morning. The report found that:

• There has been a 19.6% decline between 2001 and 2006 in the rate of consumers opening new credit card accounts. New auto loan openings dropped 17.5% and new installment loan openings dropped 15.6%
• During the same period, there has been a 12.6% increase in the rate of 90 or more days late payments.

You don't have to be a credit genius to figure out what might be happening here.  Occurrences of 90- day late payments have a major impact on consumer credit scores. Our credit scoring expert, John Ulzheimer, detailed exactly how this works in his article "Late Payment Secrets Revealed."

Most credit scoring models are designed to predict the likelihood of a consumer becoming 90 or more days late on an account. So when the consumer actually does become 90-days late on account, it can cause a dramatic drop in credit scores for up to 7 years. And we all know that dramatic drops in credit scores lead to more rejected applications for new credit. 

I wish that the Experian report would have somehow tracked applications for new credit, not just actual new account openings. I would bet that the rate of application for new credit has not dropped, and probably even increased as consumers have had a harder time being accepted for new accounts.