Young and low-income customers are beginning to experience financial strain as high inflation compels Americans to pay more on gas and bills.
Consumers in Generation Z and those with low credit ratings are racking up credit card debt at a rate unseen since before the epidemic, falling behind on auto loans and credit card payments, and collecting debt on credit cards.
For instance, according to a random sample of 12.5 million U.S. credit files compiled by credit score company VantageScore, credit card balances for people aged 25 and under increased by 30% from a year earlier in the second quarter, compared with an increase of just 11% among the general population. Non-prime borrowers, or those with credit ratings below 660, saw a roughly 25% increase in balances within the same time frame.
For months, the outlook has been positive for American consumers, whose financial accounts have been bolstered by government stimulus, student debt forbearance, and savings from the epidemic era. Bank executives have often said that despite high inflation and the weakening economy, people have solid financial reserves and are spending money.
According to VantageScore CEO Silvio Tavares, there are now indications that some Americans may have overextended their financial resources by traveling and eating out while making fewer credit card payments. According to data from the Fed, consumers had a tendency to pay off debt and become more frugal during the first year of the pandemic. In comparison to historical averages, the consumer, their balance sheets, and their debt payback histories are all robust. Tavares said, “There are some issues, though. The first of these is that customers are increasing leverage.” Jerome Powell, the chairman of the Federal Reserve, has stated that time is running out to reduce inflation, which is currently hovering near levels last seen in the 1980s.
As the economy unexpectedly declined in the second quarter, data released on Thursday indicated that consumer spending in the United States increased at its slowest rate in two years.
Retail and consumer businesses including Walmart Inc. and the creator of Tide, Procter & Gamble Co., have recently revised their sales growth projections downward in response to the rising cost of goods.
Prices that are rising quickly could make things worse for young people and borrowers with bad credit, according to Tavares. According to VantageScore, the proportion of credit card and vehicle loans among non-prime borrowers that were past due by more than 30 days increased. According to the data, credit card default rates for young people and non-prime borrowers have now returned to their pre-pandemic levels.
Although the delinquency rates are not yet alarming, Tavares added, “it’s absolutely something to watch.”
“A canary in a coal mine effect might occur. Sometimes it can spread to another group if it occurs with one group.”
One of the three major consumer credit rating companies, TransUnion, predicts that if inflation stays high, credit card delinquency rates might increase from 8 percent in the first quarter of this year to 8.4 percent in the first quarter of 2023.
Without taking into account mortgages, the average debt carried by a non-prime consumer in the first quarter of 2022 was $22,988. This is more than the $22,461 from a year ago and the $22,970 from the first quarter of 2020 before the pandemic hit the US.
Due to the surge in vehicle demand in the United States in 2021, which increased the cost and length of auto loans, auto loans account for a large portion of overall consumer debt.
The adage that a car loses value as soon as it leaves the dealer has been debunked, according to an executive at a major U.S. auto lender that deals with many non-prime customers.
According to the executive, who asked to remain anonymous because the conversation involved confidential information, customers who are 90 days overdue are more likely to pay off their debt in full. That suggests that borrowers are selling their cars in order to avoid having them repossessed by taking advantage of rising automotive valuations.
According to the CEO, auto loan default rates are currently lower than they were prior to the pandemic.
“We all anticipated that things would return to normal, so do we really believe that they won’t become worse? The query is that.”
GRADE OF CREDIT
The average credit score has increased over the recession as a result of customers spending less and consolidating debt, which is another peculiarity of the current U.S. economy.
At the end of June, the average VantageScore was 697, which is a 13-point improvement from January 2020.
The average credit score of Bank of America clients, the second-largest bank in the United States by assets, was recently reported to be 771.
These credit improvements may be fragile if consumers continue to rack up credit card debt, according to experts, especially for the youngest and lowest-income consumers who are more susceptible to the effects of price shocks from inflation.
New clients, or those who have never used credit, are riskier, according to Moshe Orenbuch, a Credit Suisse analyst who focuses on the lending portfolios of banks. “A lot of that rise (in debt) is replacing accounts people paid off early in COVID,”
