Inflation begins to weigh on the finances of young, low-income Americans
By Elizabeth Dilts Marshall
NEW YORK, Aug 1 (Reuters) – As high inflation forces Americans to spend more on gas and bills, young and low-income consumers are starting to feel financial pressure.
Gen Z consumers and those with low credit scores are falling behind on credit card and car loan bills and racking up credit card debt at rates not seen since before the pandemic.
For example, credit card balances for people aged 25 and under rose 30% in the second quarter from a year earlier, compared to an increase of just 11% in the general population, according to a random sample of 12.5 million US credit files compiled. by credit rating company VantageScore. Balances of non-preferred borrowers, or people with credit scores below 660, increased by nearly 25% over the same period.
For months, things have been going well for American consumers, their bank accounts padded by government stimulus, student loan forbearance and pandemic-era savings. Bank executives have consistently said consumers have healthy financial cushions and are spending money despite high inflation and a slowing economy.
Now, there are signs that some Americans have been overstretching their finances by traveling and dining out while paying off less credit card debt, said Silvio Tavares, head of VantageScore. This contrasts with the trend for consumers to repay their loans and be more frugal in the first year of the pandemic, according to Fed data.
“The consumer is strong, their balance sheets are strong, and their debt repayment history is strong relative to historical averages,” Tavares said. “However, there are areas of concern. The first of these is that consumers are adding leverage.”
Federal Reserve Chairman Jerome Powell said time is running out to bring down inflation, which is hovering at levels not seen since the 1980s.
Data released Thursday showed consumer spending in the United States grew at its slowest pace in two years as the economy unexpectedly contracted in the second quarter.
This price spike is forcing consumers to cut back on discretionary spending, according to retail and consumer companies like Walmart Inc and Tide-maker Procter & Gamble Co, which have lowered sales growth forecasts over the past week. .
Rapidly accelerating prices could exacerbate financial stress among young people and borrowers with low credit ratings, Tavares said.
Among unpreferred borrowers, the percentage of credit cards and auto loans more than 30 days past due also increased, VantageScore found. Credit card delinquency rates are now back to pre-pandemic levels for young people and non-preferred borrowers, the data shows.
While delinquency rates aren’t yet a concern, “it’s definitely something to watch,” Tavares said.
“You can get a bit of a canary in a coal mine effect. If it happens with one group, sometimes it can spread to another group.”
TransUnion, one of the big three consumer credit rating agencies, estimates that credit card delinquency rates could reach 8.4% in the first quarter of 2023, up from 8% in the first quarter of this year, if inflation remains high.
The average debt held by an unpreferred customer was $22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. This represents an increase from $22,461 a year earlier and $22,970 in the first quarter of 2020, before the pandemic began in the United States.
Auto loans account for a significant portion of this debt, as demand for vehicles soared in 2021 in the United States, driving up the price and term of loans for cars.
An executive at a major US-based auto lender that works with many unprivileged consumers said the demand has overturned the maxim that a car loses value as soon as it leaves the dealership.
Customers who become 90 days past due more frequently repay their loan in full, said the executive, who asked not to be named to discuss nonpublic information. This indicates that borrowers are taking advantage of high car values to sell their car, rather than having it repossessed.
For now, delinquencies on auto loans are still lower than before the pandemic, the executive said.
“We think things will go back to normal – we all expected it – but will they get worse than normal? That’s the question.
Another idiosyncrasy of the current US economy is that the average credit score has increased during the pandemic, due to consumers spending less and paying down debt.
VantageScore’s average score was 697 at the end of June, 13 points higher than in January 2020.
Bank of America, the second-largest U.S. bank by assets, recently said its average customer credit score was 771.
For younger, lower-income consumers who feel the effects of price shocks from inflation more quickly, those credit gains may be tenuous if they continue to rack up credit card debt, experts said. experts.
“All new customers — or new credit customers — are riskier,” said Moshe Orenbuch, a Credit Suisse analyst who studies banks’ loan portfolios. “A lot of this (debt) growth is replacing the balances people paid off at the start of COVID.”
(Reporting by Elizabeth Dilts Marshall; Editing by Lisa Shumaker)