Posted on November 25, 2022.

Consumers are navigating high inflation and rising interest rates

Credit card and personal loan debt reached record levels in the third quarter of 2022, as consumers face higher costs of goods and services as well as higher interest rates, according to TransUnion data. These trends indicate that consumers are likely turning to credit cards and unsecured personal loans as a way to cover their expenses amid mounting financial pressures.

"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," Michele Raneri, vice president of U.S. research and consulting at TransUnion, said in a statement.

More consumers are gaining access to additional credit and financing lines as the U.S. employment scene remains strong. As the economy added 261,000 jobs in October, average hourly earnings increased 4.7% from a year prior.

Credit card balances hit $866 billion in the third quarter, up 19% from the same quarter in 2021, according to TransUnion’s Quarterly Credit Industry Insights (CIIR) report. Among Gen Z and Millennial borrowers, credit card balances increased 72% and 32%, respectively. Balances for private label credit cards, or store-branded cards, were up 7% to $122.1 billion.

Meanwhile, total personal loan balances climbed to $210 billion, up 34% from the third quarter in 2021. Much of that growth was fueled by increases in lending to borrowers with subprime credit. The total number of personal loans hit 26.4 million, up from 21.6 million in the second quarter.

Delinquencies for most credit products were on par with pre-pandemic delinquencies, however they have been rising the past year, particularly among subprime borrowers.

High Inflation and Rising Interest Rates

The rising costs of goods and services, driven by higher costs in housing, food, and gasoline, is contributing to tighter consumer budgets. Consumer prices rose 7.7% year-over year in October, down from an annual growth rate of 8.2% in September, but well off the Federal Reserve’s target inflation rate of 2%.

To try to combat high inflation, the Fed has been regularly increasing its benchmark interest rate. It raised its benchmark rate by 0.75% to a target range of 3.75% to 4% in November, making it the sixth rate hike of 2022.

When the Fed’s rate increases, interest rates on other financial products, such as credit cards and personal loans, often change in sync. For consumers, this means that the cost of financing is rising, which can cause financial strain.

Mortgage Trends

TransUnion data also showed that mortgage originations were down 47% in the second quarter of 2022, compared to a year prior, however they were on par with pre-pandemic levels in the second quarter of 2019. (TransUnion data provides mortgage origination data one quarter in arrears.)

As home prices have been rising, homeowners are taking out fewer mortgages but more home equity products. The number of mortgage originations for home purchases declined 23% to 1.5 million in the second quarter, while originations for refinancing declined 74% to 425,000. The average balance on new mortgages was $345,557, up from $305,140 a year prior.

Loan originations for home equity lines of credit (HELOCs) and home equity loans increased 47% and 43% year-over-year, respectively.

Auto Loan Trends

The number of new auto loans also declined in the second quarter, pressured in part by a shortage in new vehicles. Originations were down 14.9% from the year prior, and down 4.1% compared to the second quarter in 2019, which was pre-pandemic.

Consumer payments increased 13.7% to $679 on new auto loans and 16.1% to $517 on loans for used cars as inflation and rising interest rates have reduced affordability.

Source: Investopedia