Credit card and personal loan debt reached record levels in the third quarter of 2022 as consumers grapple with higher costs of goods and services and higher interest rates, according to TransUnion data.
These trends suggest that consumers are likely to turn to credit cards and unsecured personal loans to cover their expenses amid increasing financial pressures.
“However, as long as the number of jobs remains high, it should maintain a steady stream of customers seeking access to new credit products, particularly credit cards and personal loans, as well as having an ample supply of lenders willing to offer credit. Michele Raneri, vice president of US research and consulting at TransUnion, said in a statement.
More consumers gain access to additional lines of credit and financing as the US employment landscape remains strong. As the economy added 261,000 jobs in October, the average hourly wage increased 4.7% year-over-year.
According to the TransUnion Quarterly Credit Industry Insights (CIIR) report, credit card balances reached $866 billion in Q3, up 19% from the same quarter of 2021.
For Gen Z and Millennial borrowers, credit card balances increased by 72% and 32%, respectively. Private label or private label credit card balances increased 7% to $122.1 billion.
Meanwhile, the total personal loan balance grew to $210 billion, up 34% from the third quarter of 2021. Much of this growth was driven by an increase in lending to subprime borrowers. Total personal loans reached 26.4 million, compared to 21.6 million in the second quarter.
Defaults on most credit products were at pre-pandemic levels but rose last year, particularly among subprime borrowers.
High inflation and even higher interest rates
Rising costs of goods and services, driven by higher housing, food and gas costs, are contributing to tighter consumer budgets. Consumer prices rose 7.7% year-on-year in October, down from September’s 8.2% annual growth rate, but well below the Federal Reserve’s 2% inflation target.
To try to combat high inflation, the Fed regularly raised its benchmark interest rate. It raised its benchmark interest rate by 0.75% in November to a target of 3.75% to 4%, marking the sixth rate hike in 2022.
As Fed rates rise, interest rates on other financial products, such as credit cards and personal loan increases, often change synchronously. For consumers, this means that financing costs increase, which can lead to financial problems.
Mortgage trends
TransUnion data also showed that mortgage originations were down 47% year-over-year in Q2 2022, but were at pre-pandemic levels in Q2 2019. As home prices rise, homeowners are taking on less mortgages but more real estate products.
Home purchase mortgage originations fell 23% to 1.5 million in the second quarter, while refinance originations fell 74% to 425,000. The average for new mortgages was $345,557, up from $305,140 a year ago.
Loans to home equity lines of credit (HELOCs) and home equity loans increased 47% and 43% year-over-year, respectively.
Car loan trends
New vehicle loan originations also declined in the second quarter, partially impacted by the shortage of new vehicles. Lending was down 14.9% year-on-year and 4.1% compared with the second quarter of 2019, before the pandemic.
Consumer payments increased 13.7% to $679 for new car loans and 16.1% to $517 for used car loans, as inflation and rising interest rates reduced affordability.