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 to turn to credit cards and unsecured personal loans as a way to cover their expenses amid increasing financial pressures.
“However, as long as headcount remains 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 at the same time, an ample supply of lenders willing to lend offer them. ,” Michele Raneri, vice president of US research and consulting at TransUnion, said in a statement.
More consumers have access to additional lines of credit and financing as US employment conditions remain strong. As the economy added 261,000 jobs in October, average hourly earnings rose 4.7% from a year earlier.
Credit card balances hit $866 billion in the third quarter, a 19% increase 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 by 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 increased to $210 billion, a 34% increase from the third quarter in 2021. Much of that growth was fueled by increases in loans 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, but have been increasing over the past year, particularly among subprime borrowers.
High Inflation and Rising Interest Rates
Rising costs of goods and services, driven by higher costs of housing, food and gasoline, are 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 outside the Federal Reserve’s target inflation rate of 2%.
To try to combat high inflation, the Fed has been increasing its benchmark interest rate regularly. It raised its benchmark rate by 0.75% to a target range of 3.75% to 4% in November, making it the sixth hike in 2022.
When the Fed rate increases, interest rates on other financial products, such as credit cards and personal loans, often change in sync. For consumers, this means the cost of financing is rising, which can put financial pressure on them.
TransUnion data also showed that mortgage originations in the second quarter of 2022 were down 47% from a year earlier, but were on par with pre-pandemic levels in the second quarter of 2019. (TransUnion data provides mortgage origination data for the quarter .in arrears.)
As home prices continue to rise, homeowners are taking out fewer mortgages and more home equity products. The number of mortgage originations for home purchases fell by 23% to 1.5 million in the second quarter, while refinancing initiations fell by 74% to 425,000. The average balance on new mortgages was $345,557, up from $305,140 a year earlier.
Loan originations for home equity lines of credit (HELOCs) and home equity loans increased 47% and 43% year over year, respectively.
Car Loan Trends
The number of new car loans also fell in the second quarter, pressured in part by a shortage of new vehicles. Initiations were down 14.9% from the previous year, and down 4.1% compared to the second quarter of 2019, which was pre-pandemic.
Consumer payments increased 13.7% to $679 on new car loans and 16.1% to $517 on used car loans as inflation reduced affordability and rising interest rates.