Consumers who enrolled in third-party debt settlement programs while current on their obligations experienced larger credit score declines than consumers who filed for bankruptcy, according to a TransUnion market brief and accompanying analysis released yesterday.
Median credit scores for current-status debt settlement enrollees fell from 645 six months before enrollment to 549 six months after, a 96-point drop. Bankruptcy filers over a comparable window went from 582 to 562, a 20-point drop. Debt settlement consumers who were 30 to 90 days past due at enrollment declined 72 points, while those 120 or more days past due declined 22 points.
TransUnion said the study did not observe a consistently stronger credit recovery outcome for debt settlement participants during the observation period. Current-status enrollees showed the slowest recovery at 24 months.
The brief reported that 53% of debt settlement enrollees were current at the time of enrollment. Among lenders included in the analysis, debt settlement enrollments grew 41% over a 12-month period while average enrollment balances stayed relatively stable.
Current-at-enrollment consumers showed rising unsecured credit usage before entering programs. Average card balances rose from roughly $7,112 at 24 months before enrollment to about $14,547 at enrollment. Card utilization climbed from about 51% to nearly 78% over the same period. Average personal loan balances went from about $12,404 to nearly $19,969.
About half of credit cards were closed for both current and delinquent debt settlement consumers within six months of enrollment, TransUnion said. Cards that were closed carried higher utilization than those that remained open.
Among enrollees who were current at enrollment, a bankruptcy-related risk score and total unsecured personal loan balance were the two most influential features in TransUnion’s predictive model, together accounting for more than half of its predictive power. In its announcement, TransUnion said adding TruVision trended attributes allowed the model to capture an additional 25% of enrollees within the highest-risk 10% of consumers.
The brief also noted that credit bureaus currently lack direct visibility into third-party debt settlement enrollment, and said capturing additional information on consumers in these programs could enhance analytics.
