People are resorting to credit cards and unsecured personal loans to cope with the bite of high inflation, new data shows — all while borrowing costs rise and the U.S. prepares for a possible recession.
Total bank card balances hit a record $866 billion in the third quarter of 2022, up 19% from the same period last year, according to TransUnion’s latest quarterly credit-industry insights report out Tuesday.
That’s been spurred by “use across all risk tiers and recent high origination growth in non-prime segments,” and higher balances among Gen Z and millennial borrowers, the credit-reporting agency said in a statement.
Delinquencies are up with the rise in available credit, too.
“However, the numbers remain in relative alignment with historical pre-pandemic levels of 2019,” Paul Siegfried, senior vice president and credit card business leader at TransUnion, said in a statement. “We are likely to see continued growth in credit card usage as increased interest rates and inflation continue to put pressure on consumers while employment numbers remain strong.”
Per borrower, the average balance has hit $5,474, an increase of 12.7% from last year, Michele Raneri, vice president of U.S. research and consulting at TransUnion, told MarketWatch. At the same time, the average credit-card rate is at a record high of 18.94%, according to Bankrate. Delinquency levels should continue to be monitored, Raneri said.
However, most card interest-rate increases aren’t retroactive, Raneri said — meaning consumers should be on their toes for any notices from credit-card companies on rate hikes for new purchases.
The Federal Reserve also released data this week showing total consumer credit up by $25 billion in September, rising at a seasonally adjusted annual rate of 6.4%. Still, that was down from the revised $30.2 billion increase the month prior, and lower than the $30 billion gain anticipated by economists. Revolving credit, including credit cards, rose by 8.7%, lower than the 18.1% jump in August.
As for unsecured personal loans, or the sort of loans that do not require collateral in case borrowers cannot pay their debts, balances grew 34% in the third quarter when compared to the previous year, reaching $210 billion, according to TransUnion.
“Unsecured personal loans are more likely to lend to people who are riskier, who have lower credit scores,” Raneri said. “Some of that has to do with a consumer’s ability to get other types of credit. So if a person has a higher credit score, they can probably get lower-cost access to funds — even credit cards.”
It can be easier for a person with a lower credit score to get a subprime loan, however, from one of the several fintech companies that now dabble in the space.
Mortgage originations, meanwhile, continued their decline in the second quarter of 2022, down 47% from the same period last year, according to the TransUnion report. But homeowners still have plenty of equity to tap — $19.6 trillion in aggregate in the second quarter — and appear to be taking advantage of that, with home equity line of credit (HELOC) and home equity loan originations up 47% and 43%, respectively, in the past year.
“Consumers who have equity in their homes — who have $100,000 or hundreds of thousands of dollars in their homes — it would be really expensive for them to get a big refinance on their home right now, and they’d have to pay the higher associated interest rate with all of that,” Raneri said. “What they are doing, which is smart, is they’re peeling off just the piece that they need and paying the interest on that, so it’s limiting their exposure to the higher interest rate environment.”