Regulators are often critical of credit bureaus, but it is ironic when you consider how federal government agencies toil with their consumer responsibilities. Take the IRS, for example, where the National Tax Advocate, an IRS independent unit, reported that “At the end of May, the agency had a backlog of 21.3 million unprocessed paper tax returns, an increase of 1.3 million over the same time last year.” Or, take a shot at calling the IRS for information, and if you do not get disconnected while on hold, your phone battery may fail after two hours. Handling and securing data is a tough job.
But credit bureaus or Credit Reporting Agencies (CRA) handle billions of updates yearly, and they have rich data in their files. TransUnion provides a quarterly snapshot of the consumer industry.
The WSJ noted yesterday that credit card banks have not slowed down their solicitations, despite the inevitable recession. Consumer budgets are stressed, Inflation is running at record levels, and consumers express concern. As Mercator continues to beat the drum about slowing down loan growth, indicators from TransUnion’s Q2 2022 Credit Industry Insights report show crucial signals about credit risk and rapid growth as the economy sails into a storm.
Loan Growth for Credit Cards and Unsecured Personal Loans
Credit cards and unsecured personal loans are the core areas of unsecured consumer credit. Year over Year, TransUnion reports that loans to subprime segments rose from 8.1% in Q2 2021 to 11.8% in Q2 2022. For consumer cards, average car debt rose to $5,270 from $4,187 during the same period.
Put TransUnion’s numbers together with the current 9.1% inflation rate and household budgets are clearly under stress. It does not take a data scientist to tell you credit will soon move into a risky, high-loss potential status.
Then, consider Trans Union’s delinquency numbers. Credit card delinquencies for accounts 90+ days delinquent nearly doubled, from 0.95% in Q2 2021 to 1.57% in Q2 2022. The metric remains below 1.72% in Q2 2019, but a big pop is a big pop. Consumers who do not keep their salary on par with inflation rates will soon experience issues as their balances build and credit line utilization rates increase.
Auto Loans Add to the Budget Burden
Who does not like a new car? Loan originations fell slightly to 81.4 million in Q2 2022, but the average monthly payment skyrocketed to $654. Even a used car is high at $505. On top of that, remember the consumer will need to carry collision and make the lender the loss payee on the coverage.
HELOCs: No Longer a Sleeper Product (for now)
Home Equity Lines of Credit (HELOCs) fell by more than 10% between Q2 2020 and Q2 2021, but they made up for a shortfall as they grew from 207,422 in Q1 2022 to 291,736 in Q2 2022.
Credit Policy Mangers: Tie these Metrics Together
In the current market, credit card bookings and consumer loans continue to grow, at a time when all credit metrics show stress. 90-day card delinquencies nearly doubled, quarter over quarter. Auto loan payments are higher than ever, and more people are placing liens against their homes to consolidate their bills. A storm is brewing. 2022 full year will likely see a continuing rise in loan losses, but as you build your 2023 budgets, look at the bureau data and temper your optimistic expectations. Assuming that inflation will not quickly decrease from 9.1% back to the Fed’s 2% goal in the short term unless growth is tempered, credit quality will surely diminish.
And, keep in mind, Durbin 2.0 targets credit card interchange, the funding source for credit card rewards, which would diminish credit card non-interest revenue at the same time that charge-offs increase non-interest expenses.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group