According to TransUnion statistics, consumer debt on credit cards and personal loans hit record highs in the third quarter of 2022 due to rising prices for goods and services and interest rates. These patterns suggest that customers use credit cards and unsecured personal loans to pay their bills in the face of increasing financial pressures.
According to Michele Raneri, vice president of US research and consulting at TransUnion, “However, as long as employment numbers remain strong, there should continue to be a steady flow of customers seeking access to new credit products, credit cards and personal loans in particular, and concurrently, an ample supply of lenders willing to offer credit to them.”
Due to the continued strength of the US employment market, more consumers are being given access to new credit and financing options. The economy added 261,000 jobs in October, and hourly wages grew 4.7% over the same month last year.
According to TransUnion’s Quarterly Credit Industry Insights (CIIR) report, credit card balances reached USD 866 billion in the third quarter, a 19% increase over the same quarter in 2021.
Furthermore, credit card balances surged 72% and 32% among Gen Z and Millennial borrowers, respectively. In addition, private-label credit card balances, also known as store-branded cards, increased by 7% to $122.1 billion.
The overall value of all personal loans increased to USD 210 billion, up 34% from the third quarter of 2021. In addition, lending to borrowers with subprime credit increased, significantly contributing to that expansion. As a result, personal loans increased from 21.6 million in the second quarter to 26.4 million overall.
Delinquencies for most credit products were comparable to those before the pandemic, although they have increased over the past year, especially for subprime borrowers.
Inflation & Rising Rates
Rising costs of housing, food, and gasoline are tightening consumer budgets. As a result, consumer prices grew 7.7% year-over-year in October, down from 8.2% in September but above the Fed’s 2% objective.
The Fed has raised its benchmark interest rate to combat excessive inflation. In November, it hiked its benchmark rate by 0.75 percentage points to a range of 3.75 to 4%.
When the Fed’s rate rises, credit card and personal loan rates follow suit. This implies consumers’ financing costs are growing, causing financial distress.
TransUnion data also showed that mortgage originations were down 47% in the second quarter of 2022 compared to the same period in 2021. TransUnion data needs to catch up on mortgage origination.
Rising home values have led to fewer mortgages and more home equity solutions. Second-quarter mortgage originations for home purchases fell 23% to 1.5 million while refinancing originations fell 74% to 425,000. New mortgages averaged USD 345,557, up from USD 305,140 last year. HELOCs and home equity loans grew 47% and 43% year-over-year.
Auto Loan Trends
A scarcity of new vehicles also reduced the number of new auto loans in the second quarter. As a result, originations were down 14.9% from a year ago and 4.1% from pre-pandemic Q2 2019.
Inflation and rising interest rates have affected the affordability of new and used car loans.