Young and low-income customers are beginning to experience financial strain as high inflation compels Americans to pay more on gasoline and bills.
Consumers in Generation Z and others with low credit ratings are racking up credit card loans 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 reports summarised by credit score corporation VantageScore, CC balances for individuals aged 25 and under increased by 30% from a year earlier in the second quarter, especially in comparison with an increment 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 some months, things have been going well for American consumers, who have seen their financial accounts bolstered by government stimulus, deferral of student loans, and savings from the epidemic era.
Bank executives have often said that notwithstanding 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.
Fed data show that’s in contrast to consumers’ propensity to pay off debt and become more cautious during the pandemic’s first year.
According to Tavares, the consumer is robust, as are their balance sheets and loan repayment records as compared to historical norms.
There are some issues, though. Consumers are increasing their borrowing capacity, and according to Chairman Jerome Powell of the Federal Reserve, time is running out to reduce inflation, which is hanging near levels last seen in the 1980s.
As the economy abruptly 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. (WMT.N) and the creator of Tide, Procter & Gamble Co. (PG.N), 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 adults and borrowers with bad credit, according to Tavares.
As per 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 younger generations and non-prime borrowers have now returned to their pre-pandemic levels.
Although the delinquency statistics are not yet alarming, Tavares said they should be closely monitored.
Additionally, he said that there is a possibility of a parakeet in a coal mine consequence. Sometimes it can migrate to some other group if it occurs within one group.
Without taking into account mortgages, the average debt carried by a non-prime consumer in the first period of 2022 was $22,988. This is more than the $22,461 from a year ago and the $22,970 from the 1Q of 2020 before the coronavirus hit the US.
Due to the surge in vehicle demand in the U.S. 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 vehicle loses worth as soon as it departs 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 requested anonymity 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 to avoid having them repossessed by taking advantage of rising automotive valuations.
Meanwhile, the CEO said that auto loan default rates are currently lower than they were before the pandemic.