With high inflation and soaring rates, American consumers increasingly have been turning to credit products to help them cope with the financial pressures they’re being hit with. It seems like this phenomenon might continue in the near future, as interest rates are still increasing — albeit at a slower pace.
The TransUnion’s new Q4 2022 Quarterly Credit Industry Insights Report found that these products run the credit line gamut, whether it’s Gen Z consumers opening credit cards, homeowners taking out home equity lines of credit (HELOCs) or consumers continuing to turn to unsecured personal loans.
“Whether it’s shopping for a new car or buying eggs in the grocery store, consumers continue to be impacted in ways big and small by both high inflation and the interest rate hikes implemented by the Federal Reserve, which we anticipate may continue for at least a few more months,” Michele Raneri, vice president of U.S. research and consulting at TransUnion, said in a statement.
“If more moderated rate hikes continue, it would be a good sign that the increases have been working and that some relief from high inflation may be on the horizon. Until then, we fully expect consumers to continue to look to credit products such as credit cards, HELOCs and unsecured personal loans to help make ends meet and put themselves in stronger financial standing moving forward.”
Here’s more on how consumers have turned to credit during this economy.
Credit Usage and Balances Have Increased
In 2022, there was an all-time high in origination of bank cards and personal loans, the survey found. Gen Z consumers increasingly continued to turn to bank cards, with a growth of 19% in originations year over year and 64% in balances over the same period.
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Further underscoring the increased credit usage, credit card balances continued to grow as well, reaching record levels at the end of 2022, the survey showed. However, it also noted that there was an upward trend in credit card delinquencies in both bank card and private label, something TransUnion deemed “somewhat concerning.”
“Credit card balances continued to grow, reaching record levels at the end of 2022,” Raneri said. “Originations are increasing because of inflation causing goods and services to cost more and the savings rate is significantly lower than it has been … in many years. So, people are borrowing more, as seen in the increased originations and balances in [the fourth quarter of 2022].”
Severe bank card delinquencies have increased to a level not seen since 2012, according to TransUnion. Raneri explained that this is due to inflation and higher interest rates.
“At the same time, the savings rate as a percentage of disposable income is at levels not seen in over a decade,” Raneri said. “When this happens, consumers turn to credit as a tool to get them through their financial stress. The silver lining is that unemployment continues to be low. If the unemployment rate increases significantly, it’s likely the delinquency rate for credit cards as well as other lending products will increase.”
Credit Will Be at a Premium in 2023
As for 2023, Raneri expects credit to be a little harder to get and originations to likely decrease as lenders proceed with caution.
However, she added, “Auto and home equity products will become easier to get compared to other products, so we expect originations of auto, home equity lines and loans to increase in 2023.
“HELOCs and home equity loans continue to grow at unprecedented levels as homeowners increasingly take advantage of the record levels of tappable home equity they have built in their homes.”
The main reasons homeowners utilize the equity available to them is to consolidate debt, home improvement and big ticket purchases, Raneri added.
Indeed, when interest rates go up, homeowners often will turn to HELOCs or home equity loans to get cash out of their houses but not refinance the entire house, she added.
“Instead of refinancing the entire $300,000 to get to $100,000 of equity and refinance at twice the interest rate they originally had, they can peel off that piece of equity and just finance the $100,000,” Raneri said. “Since home equity loans are often better interest rates than other types of loans, it is typical for consumers to use their equity to pay off other loans and consolidate them into one loan that is cheaper.”
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