Consumer lenders have no way to pull back until the inflationary storm hitting the United States has passed. Many strangled long ago when the pandemic first hit in 2020, but found it unsustainable.
Recalling that time, Charlie Wise, senior vice president and head of global research and consulting at TransUnion, said riskier borrowing was having a hard time getting new credit cards and personal loans because many lenders consumers have tightened the credit tap.
“But the reality was that there wasn’t as much demand for credit among low-risk borrowers,” Wise says in an interview with The financial brand. “Super-prime people didn’t need new cards to the same extent as people with lower ratings and they don’t usually use personal loans even in normal times. So we’ve seen consumer lenders become more comfortable lending to riskier borrowers, because they’re the ones who need the credit. »
It turns out that this period was just an introduction to the market conditions in which inflation rushes through the economy.
Consumer Need for Credit Returns
Wise says that even at a time when the country is facing higher inflation than seen since the 1980s, banks and other consumer lenders have yet to continue growing.
“The worst thing you can do as a lender is stop creating,” says Wise. “I can promise you that your delinquencies will start to increase quite significantly if you stop lending, because your denominator is not increasing. So you get additional delinquencies on top of a stagnant or declining base.
The truth is, “riskier borrowers will always be in greater demand from creditors than lower-risk borrowers,” Wise says. “The balance lenders need to feel comfortable with is between risk and reward and appropriate pricing.”
As inflation has taken hold, many of the consumers who represent potential growth for consumer lenders are facing increased financial hardship as they pay more for gas, groceries and rent.
As a result, the deleveraging seen at the height of the pandemic has reversed.
“We’ve started to see consumer balances come back strong on credit cards, as inflation causes a lot of wallet stretching.”
—Charlie Wise, TransUnion
People are turning to credit, not necessarily for desperate spending, Wise says, but because “they’re going back to borrowing levels we had before the pandemic.”
The average non-mortgage balance per consumer is rising again after falling during the early stages of the pandemic
*VantageScore 4.0 risk range of 300-660; **VantageScore 4.0 risk range of 661 to 850
Source: Trans Union
Another factor increasing demand for consumer credit is the end of much of the excess liquidity seen during the pandemic. A combination of federal and state stimulus payments, plus the elimination of travel and other costs for many people, has pushed many to pay down debt and save what they can.
That was then, it is now, as they say.
“That excess consumer liquidity is gone,” says Wise. “The country is now below pre-pandemic savings levels. Depositors no longer rely on this and they go back to using credit as they did before.
Are riskier consumers worth the risk?
TransUnion research and other data indicate that the weak prime borrower has made a resurgence and represents a source of potential growth.
“We’ve seen an increase in delinquency, but overall it’s still at or below the levels we saw before the pandemic,” Wise says.
Beyond that, Wise says wage data from the federal government and other sources indicate that many riskier borrowers are working in jobs that have seen higher-than-inflation wage increases as employers pay for guarantee enough manpower in the current market.
“The people you consider to be at risk are the ones who benefit the most from wage gains,” says Wise, “because workers in service industries and other sectors see their wages increase dramatically. The high-risk borrower is a little better paid in this inflationary environment.
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Credit Outlook in a Continuing Inflationary Environment
One of the general conclusions of TransUnion’s research, “Identifying Resilient Consumers in Times of Inflation,” is that levels of delinquency will generally not exceed those recorded before the pandemic. That should hold even under the worst inflation forecasts, according to Wise. LINK:
“In addition, consumer credit markets are likely to experience more positive credit behavior once inflation subsides,” Wise says.
As inflation has increased over the past year, serious crime rates have also increased
Source: Trans Union
Default rates have increased, as shown in the chart above, for both revolving debt, such as credit cards, and non-revolving debt, such as mortgages and auto loans. Wise notes that rising inflation has hit credit card payments, with consumers who recently opened card accounts defaulting at a higher level compared to 2019.
“It is not surprising to see an increase in credit card delinquencies, especially considering that many young consumers have not experienced high inflation or rising interest rates in their lifetime. adult,” says Wise. He thinks delinquencies will stabilize as this major economic shift is better understood.
“At the same time, it’s important to keep in mind that even with these recent increases, overall delinquency levels for most products remain below pre-pandemic levels,” Wise says.
Read more: 50+ credit card trends and statistics for banks in 2022
Implications for financing Buy now, pay later
The fundamental impact of inflation, rising prices, will help buy now, pay later, credit will continue to grow, according to Wise. “The rate of growth may not accelerate, but the growth will continue,” he says.
“More and more consumers are saying, ‘Boy, when I get to the checkout, they give me four payments instead of having to put it on my credit card. That seems like a good deal,'” Wise says “There’s a psychological advantage to having those debts paid off and the debt gone, versus putting something on the card and therefore you keep paying later.”
In fact, Wise thinks that if the BNPL hadn’t come, demand for new credit cards would have been higher in an inflationary environment, as people seek more credit to maintain their lifestyle.
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