Rising Inflation Impacting Non-Prime Borrowers Most, Though Many Consumers Proving to be Resilient under Challenging Circumstances
New TransUnion study explores consumer resiliency amid rising inflation
As rapidly rising gasoline, energy and utility prices, among other factors, drive inflation to levels not seen since the 1980s, non-prime borrowers – those consumers with the riskiest credit profiles – have generally experienced the greatest impact to their wallets. A new TransUnion (NYSE: TRU) study, “Identifying Resilient Consumers During Inflationary Times,” found that non-prime borrowers have seen the greatest percentage rise in both credit balances and delinquency rates since early 2021, which coincides with the period when inflation has risen significantly.
The study was featured at this week’s 2022 TransUnion Financial Services Summit, which is attended by hundreds of executives from across the country. While the study pointed to the impact of inflation on consumer wallets, it also highlighted how increases in delinquency levels on many lending products leave current rates near or below levels observed at the end of 2019, prior to the COVID-19 pandemic. Furthermore, the study found that even though credit balances are rising, more consumers are making payments each month over their minimum due amounts, an indication of consumer resiliency.
“Inflation is expected to remain high through at least the end of 2022. Its impact on consumer wallets is clear – balances are rising and we are seeing an uptick in delinquency rates. Our study determined that consumers in varying credit risk tiers and with different product types will face unique impacts. One of the key conclusions from the study is that while a prolonged, elevated inflation environment will negatively impact many consumers, serious delinquency rates will generally not rise above levels seen prior to the pandemic, even under worst-case inflation scenarios. Furthermore, consumer credit markets will likely see more positive credit behavior once inflation abates.”
Credit Balances Growing For Consumers, Including Non-Prime Borrowers
The study found that a combination of factors has likely led to higher consumer balances for non-mortgage lending products. First, lending has recovered to more “normal” conditions following a slowdown at the beginning of COVID-19. Second, higher prices for consumer goods and services, including not only daily household purchases but also larger ticket categories like automobiles and home renovations, has increased new loan amounts and has helped push up consumer balances.
Average Non-Mortgage Balance per Consumer Increasing Again After Dropping During Early Stages of Pandemic
Prime and Above**
*VantageScore 4.0 risk range of 300-660; **VantageScore 4.0 risk range of 661-850
Consumers also are experiencing an increased debt service burden each month for both non-revolving (e.g. auto and personal loans) and revolving (e.g. credit cards) accounts. Average monthly minimum payment due amounts on revolving accounts for non-prime consumers have increased to $194 in Q1 2022 from $182 in Q1 2021; non-revolving monthly payment due amounts have risen to $557 from $513 over the same period. Prime and above consumers have only seen a marginal rise in revolving monthly payments due (up to $143 in Q1 2022 from $137 in Q1 2021) with a more pronounced rise in non-revolving monthly obligations ($954 from $905 in the same timeframe).
Despite the rise in debt obligations, the study found that more consumers were making excess payments in Q1 2022 than they were pre-pandemic, particularly those in below prime risk tiers. Interestingly, subprime borrowers saw the greatest improvement in this regard. Nearly three in 10 subprime borrowers are now making monthly payments in excess of the minimum due, a marked rise from Q1 2020.
“Making on-time payments and keeping credit utilization rates relatively low are key factors in credit score calculations. While challenges abound for consumers in the current inflationary environment, it is heartening to see borrowers, especially those in the riskiest credit categories, make an effort to pay down more of their monthly payment obligations,” said Margaret Poe, head of consumer credit education at TransUnion. “Building a foundation of sound financial and credit habits and practicing them consistently are the keys to long-term credit health.”
Serious Delinquency Rates Rising, But Not Yet at Concerning Levels
As debt obligations increase from pandemic-era lows, the study also determined that serious delinquency rates have risen in the last year for both revolving and non-revolving debt. The rise in delinquencies has occurred as the inflation rate hit a nearly 40-year high at the beginning of 2022.
As Inflation Has Increased Over the Past Year, So Have Serious Delinquency Rates
Annual Inflation Rate
Revolving 90+ DPD
Non-Revolving 60+ DPD
Elevated inflation also appears to have negatively impacted payments of credit cards – the most widely used credit product. Consumers with recent card originations entered early default at a higher level compared to 2019. For instance, 8.53% of subprime borrowers with VantageScore 4.0 scores between 580-600 who opened a credit card in October 2021 became 30+ days past due on their account three months after origination. For October 2019 originations, this rate was 6.92%.
“It is not surprising to see a rise in credit card delinquencies, especially when considering many younger consumers have not experienced either high inflation or rising interest rates in their adult lives. As consumers become more aware of the impact of inflation on their cost of living and adjust their behaviors accordingly, we could see these recent delinquency increases stabilize. At the same time, it is important to keep in mind that, even with these recent increases, overall delinquency levels for most products remain below pre-pandemic levels,” added Wise.
TransUnion developed a forecast model to observe the impact of high, baseline/expected and low inflation scenarios over the next year through Q1 2023. The baseline and high inflation scenarios are based on forecast provided by Oxford Economics. In all of the scenarios, the inflation rate would decline from 8.5% in Q1 2022 to a lower level in Q1 2023 – 5.68% (high); 3.58% (baseline/expected); and 1.48% (low).
For credit cards, the good news is that the high inflation model shows that non-prime borrower consumer delinquency rates for credit cards would only rise to 8.38% in Q1 2023 from the current 8.02% in Q1 2022. While well above lows observed in Q1 2021 when consumers were receiving significant government financial support, it is still significantly lower than the pre-pandemic Q1 2020 rate of 9.24%.
Unsecured personal loan delinquencies appear sensitive to higher inflation across all risk tiers, with delinquency under the high inflation scenario slightly above the pre-pandemic Q1 2020 level, whereas under the baseline inflation scenario, forecast delinquency rates are roughly the same as in Q1 2020. For auto loan borrowers, only the below prime risk tier is sensitive to higher delinquencies under the high inflation scenario.
“As with many forms of payment shock, a segment of consumers will be more vulnerable to rising costs of living and the resulting strains on the consumer wallet. However, not all consumers – even in high-risk tiers – are vulnerable. Credit scores remain very effective at rank-ordering risk, but our study also highlights the need to leverage trended data and other sources of information that help identify consumers whose payment behavior indicates greater resilience and capacity to absorb rising living costs,” concluded Wise.
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