Credit Card, Personal Loan Balances Hit Record Highs Amid Soaring Inflation, Rising Rates

Credit cards are widening the gap between the rich and poor. A study says that credit cards often make the wealthy wealthier and those who are less fortunate more in debt. (Spencer Platt/Getty Images)

As consumers grapple with surging inflation and rising interest rates, more Americans are taking on extra debt to mitigate household financial pressures, a new report found.

According to TransUnion’s Q3 2022 Quarterly Credit Industry Insights Report (CIIR), credit card balances advanced 19 percent year over year in the third quarter, to an all-time high of $866 billion. The growth was driven heavily by Generation Z and millennial borrowers, with balances expanding by 72 percent and 32 percent, respectively.

The average credit card debt per borrower was $5,474, up 12 percent from last year. The delinquency rate also edged up, to 1.94 percent during the July–September period, up from 1.13 percent at the same time a year ago.

“In this inflationary environment, consumers are increasingly turning to credit, as evidenced by the record total bankcard balances this quarter,” said Paul Siegfried, a senior vice president and credit card business leader at TransUnion, in a statement. “This is particularly true among the subprime segment of consumers. Delinquencies are rising, which is to be expected given the increase in consumers getting access to credit, many for the first time.”

In the previous quarter, a record 22 million consumers maintained an unsecured personal loan, with total balances climbing 34 percent year over year, to $210 billion. The delinquency rate surged to 3.89 percent, up from 2.52 percent in the third quarter of 2021. The average debt per borrower was $10,749, rising more than 14 percent year over year.

Shoppers are seen in a Kroger supermarket in Atlanta, Ga., on Oct. 14, 2022.
(Elijah Nouvelage/AFP via Getty Images)

“As expected, increased lending to higher risk tiers drove increased overall delinquency rates, with serious delinquencies now exceeding pre-pandemic levels,” noted Liz Pagel, the senior vice president of consumer lending at TransUnion.

Meanwhile, more homeowners are borrowing against their residential properties. TransUnion data found that the number of home equity line of credit originations advanced at an annualized rate of 47 percent, to more than 409,000, and home equity loan originations swelled 42 percent, to 296,723.

But delinquency rates have been low, coming in at 0.6 percent compared to 1.02 percent in the third quarter of 2019.

While the number of auto loans has tumbled more than 2 percent year over year, to 81.2 million, the delinquency rate has been steadily climbing, to 1.65 percent. This is most pronounced among subprime borrowers, says Satyan Merchant, the senior vice president and automotive business leader at TransUnion.

“Delinquencies are up, particularly among subprime consumers, a trend which we expect to continue for the immediate near-term,” stated Merchant. “However, the overall delinquency rate remains in relative alignment with historical norms.”

In addition, average monthly payments for new and used vehicles rose to $679 and $517, respectively. Further, the average balance advanced nearly 14 percent, to $29,169, and the average debt per account jumped 9 percent, to $18,405.

This comes after the Federal Reserve and credit bureau Equifax reported that total consumer credit advanced $25 billion in September, resulting in a seasonally adjusted annual rate of 6.4 percent. In August, consumer credit growth was $30.2 billion, and the annualized pace was 7.8 percent. Revolving credit, such as credit cards, climbed 8.7 percent, down from 18.1 percent in August.

Overall, in the third quarter, revolving credit surged 12.9 percent. Non-revolving credit, including auto and student loans, jumped 5.7 percent.

The Rise of Delinquency Rates?

According to the Federal Reserve Bank of New York’s Liberty Street Economics blog, the most notable concern is the end of historically low delinquency rates.

“With the supportive policies of the pandemic mostly in the past, there are pockets of borrowers who are beginning to show some distress on their debt. Upticks in delinquency transition rates are visible in aggregate,” wrote economists Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Joelle Scally, and Wilbert van der Klaauw in the blog post in August.

“When we break these out by neighborhood income using borrower zip codes, we observe that the delinquency transition rates for credit cards and auto loans are creeping up, particularly in lower-income areas. These rates appear to be resuming a trend in rising delinquencies among subprime borrowers that we had begun to see in 2019 in auto loans, where subprime borrowers retain a nontrivial share of the outstanding balances.”

But it is not all bad news in the U.S. economy regarding private debt trends. CoreLogic data found that 2.8 percent of all U.S. mortgages were in some stage of delinquency in August, down from 4 percent a year ago. This is the lowest level since before the coronavirus pandemic.

Early-stage delinquency rate (30–59 days past due) was 1.2 percent in August, up from 1.1 percent. Adverse delinquency (60–90 days past due) was unchanged at 0.3 percent. Serious delinquency (90 days or more past due) was 1.2 percent, down from 2.6 percent in August 2021. The foreclosure inventory rate inched higher to 0.3 percent, up from 0.2 percent.

“The share of U.S. borrowers who are six months or more late on their mortgage payments fell to a two-year low in August and was less than one-third of the pandemic high recorded in February 2021,” said Molly Boesel, principal economist at CoreLogic, in a statement. “Furthermore, the foreclosure rate remained near an all-time low, which indicates that borrowers who were moving out of late-stage delinquencies found alternatives to defaulting on their mortgages.”

Americans Struggling with Cost of Living

A recent Lending Club report found that 63 percent of Americans were living paycheck to paycheck in September, slightly below the record high of 64 percent in March.

Many households are struggling to keep up with the cost of living in the United States. In September, the annual inflation rate stood at 8.2 percent, while real average hourly earnings (inflation-adjusted) was negative 3 percent, according to the Bureau of Labor Statistics (BLS). This is in addition to higher interest rates throughout the entire credit market.

Is this, then, the pain that Fed Chair Jerome Powell warned about this past summer?