Reuters: Young and low-income customers are feeling financial pressure due to increased inflation.
Generation Z and individuals with low credit ratings are falling behind on credit card and auto loan instalments and collecting credit card debt at a pandemic-era pace.
According to a random sample of 12.5 million U.S. credit files gathered by VantageScore, credit card balances for people ages 25 and younger jumped by 30% in the second quarter from a year earlier. Non-prime borrowers’ balances grew by 25% over the same time.
Government stimulus, student loan forbearance, and pandemic savings have inflated U.S. households’ bank coffers for months. Consumers have solid financial cushions and are spending despite high inflation and a faltering economy, say bank executives. Some Americans have overextended their finances by traveling and dining out while paying off less credit card debt, said VantageScore’s Silvio Tavares. Fed records show that in the first year of the pandemic, consumers paid down loans and were more frugal. Tavares: “Consumers have good balance sheets and debt payback histories relative to historical averages.” “Concerns remain. Consumers are gaining power. ” Fed Chairman Jerome Powell says time is running out to reduce inflation, which is near 1980s levels.
As the economy unexpectedly fell in the second quarter, consumer spending rose at its slowest level in two years.
Walmart (NYSE:WMT) Inc. and Tide-maker Procter & Gamble (NYSE:PG) Co. decreased sales growth predictions during the last week due to rising pricing.
Tavares warned rising prices could strain young people and those with poor credit. VantageScore revealed that non-prime borrowers’ credit card and vehicle loan delinquencies rose. Young individuals and non-prime borrowers now have pre-pandemic credit card delinquency rates.
“It’s something to watch,” Tavares said of delinquency rates.
“Canary in the coal mine effect. It can spread from one group to another. “
TransUnion (NYSE:TRU), one of the three major consumer credit rating agencies, predicts credit card delinquency rates could grow to 8.4% in the first quarter of 2023 if inflation remains strong.
According to TransUnion, a non-prime customer’s average debt was $22,988 in the first quarter of 2022. That’s up from $22,461 a year ago and $22,970 before the outbreak in the US.
Demand for autos in the US surged in 2021, pushing up the price and duration of auto loans.
A big U.S. auto lender that deals with many non-prime buyers claimed demand had upended the dogma that a car loses value after leaving the dealer.
Customers who are 90 days behind pay up their loans more often, stated an unnamed executive. That means debtors are selling their cars to avoid repossession.
The CEO stated auto loan delinquencies are fewer than before the outbreak.
“We anticipate things to return to normal, but will they worsen? How?”
REPUTATION
As individuals spend less and pay down debt, the average credit score has climbed in the U.S.
End-June VantageScore was 697, 13 points higher than January 2020.
U.S. credit scores are high. https://tmsnrt.rs/3oGRvvt
The second-largest U.S. bank by assets, Bank of America (NYSE:BAC), stated its clients’ average credit score is 771.
If young and low-income individuals continue to accumulate credit card debt, their credit gains may be precarious, experts say.
Moshe Orenbuch, a Credit Suisse analyst who examines bank loan portfolios, said new consumers are riskier. “Much of such debt growth replaces amounts paid off early in COVID.”
