Are borrowers financially healthier or worse off 12 months after borrowing?

[steveellison]

So most online lender loans are used for credit card consolidation from a revolver into a term loan, and a lower rate. Seems great on paper.  However, the credit lines stay open, so unless the consumer stops using the credit card they consolidated, they could keep using the card that got them into debt originally.

Has anyone seen data about FICO, avg. debt levels of a borrower 12 months (not 3 months) after taking out a loan?

[Fred93]

LC lets you see the FICO vs time of borrowers on all notes you own, so many of us are familiar with the general shape of the curve.  Most usually it bumps up shortly after an LC loan originates (likely because they tend to pay off some other debt) and then drifts back down over time.  Of course each person is different.  Some go up, some go down, etc.

I did a study where I took all my notes, and asked the question where are they now vs when I bought the note.  This isn't exactly the same as your "12 month" question, and of course it is based on my note selection criteria rather than all loans.

My result was that it was pretty even.  A little more UP than DOWN. 

[AnilG]

My Feb 2014 blog post about FICO Score Trends and Defaults https://www.peercube.com/blog/post/fico-score-trends-and-defaults-for-lending-club-loans may offer some insights.

[fliphusker]

Here is the quandary about FICO scores and LC. We do not get a chance to see what is going on with their FICO scores and causing upward movement or downward movement. If we did, our decisions would be a lot different.

I will throw out a scenario.
Let's say my FICO score is 680.
I do not have any delinquencies in the past 12 months but have several that are four years old.
My overall CC utilization is 80%. We can see how many lines of credit a borrower has, but not how many of them are for CCs. And debt of $28K on them.

So I get my big fat check from LC for $30k.
So I pay off all my CCs at once. Thre things happen here. My overall utilization drops down to under 5%. (I still run balances but never accrue interest to get those yummy cash back rewards.) The other thing is that each card's utilization drops. This has almost the same impact of having an overall high utilization. The last thing is my FICO score takes a little hit due to the hard pull.
But I have decided that I am not going to need a solid FICO score for the next few years and that the debt on those once delinquent accounts will fall off my FICO score in a couple of years. So I am not going to pay them.

So I get a big initial boost to my FICO, 50 points, but a few months later those accounts I quit paying on now kill my FICO score and drop it 80.
As I am not running up big balances on my favorite cash back card, they drop my credit limit in half. (This might be larger than usual, but my card does not have a high credit limit to begin with.) Now my utilization on that CC went from under 10% to over 30%. (Probably too steep but makes my analysis better. lol) 30% is one of the steps that once your utilization goes over has a bigger impact on your FICO. Drops my FICO another 40 points.

So while I have not missed a payment yet, my FICO score is plunging lower and I am actually quite stable financially and saving oodles on CC interest.
How many sell this note at a discount?
I showed awhile back how my own FICO has spiked up and down due to varying factors. Some of the drops were as high as 50 points. Many would see me as a bad investment based upon the drops. But there was factors I was dealing with that one could not see. (I did some big remodeling and took out an HELOC, and killed my utilization for a month on two cards for the cash back rewards. But paid them in full the next month.)
As note holders, we will never know what is really going on with someone's credit, as we have way too much limited information. We can draw some assumptions but that is about it.
Big bounces mean that utilization has been taken care of.
Huge drops mean at least debt is reported as late or sent to collections or that utilization has spiked. But we do not know if it was utilization on one card or overall.
We can tell by a slowly creeping down FICO that utilization is increasing slowly.

Anil's article was very solid and thanks for the read. But the question I put out there. Which is more scary, a one-time drop in FICO or a steadily declining one? Now that I would love to see which is more likely to default.
Anil did point out a great thing, that the higher the FICO the easier it is to move down, not up.

I hope my long ramble makes sense.

(One of the commenters in Anil's article talked about his 850 FICO and getting denied. This is not uncommon either and shows that FICO scores are not the most important factor.)
Myfico.com is a great resource dealing with FICO scores.

[Rhonda9080]

You just perfectly described me as Prosper borrower! I was never later on CC or loan payments, but my credit score drifted down over time, even though I was actually paying more than minimum amount each month. AND I am self-employed! I looked so much worse on paper, but as a x2 Prosper borrower, I turned out to be worth the risk.