Rising Inflation Pushing Non-Prime Debt and Delinquencies: Is It Time to Worry?

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With inflation at a 41-year high, combined with rising interest rates and exploding food and gas prices, there has been a significant impact on U.S. personal debt balances and an uptick in delinquency rates. However, these increases in debt balances and delinquencies have not yet reached “concerning levels,” and said rates have generally not returned to pre-pandemic levels, per a new study.

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A new TransUnion study, “Identifying Resilient Consumers During Inflationary Times,” found that non-prime borrowers — consumers with the riskiest credit profiles — have seen the greatest percentage rise concerning both credit balances and delinquency rates since early 2021. This period coincides with the notable increase in recent inflation. At the same time, the study found that more consumers are making payments each month over their minimum due.

Charlie Wise, SVP and head of global research and consulting at TransUnion, told GOBankingRates that the study highlighted how increases in delinquency levels on many lending products leave current rates near or below levels observed at the end of 2019 (prior to the COVID-19 pandemic).

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“Since performance hasn’t shown a significant deterioration since inflation has started, it is a sign that consumers are still performing fairly well on their debt obligations,” Wise said.

Wise added that one of the key findings of the study is that while a prolonged, elevated inflation environment will negatively impact many consumers, serious delinquency rates will generally not rise above levels seen prior to the pandemic — even under worst-case inflation scenarios.

Good News: More People Making Excess Payments Against High-Interest Debt

In addition, despite the rise in debt obligations, the study found that more consumers were making excess payments in the first quarter of 2022 than they were pre-pandemic, with non-prime borrowers seeing the greatest improvement in this regard. The study finds that nearly three in 10 non-prime borrowers are now making monthly payments in excess of the minimum due, a marked rise from the first quarter of 2020.

“A reason many of these non-prime consumers were able to increase their AEP [Aggregate Excess Payment] during the pandemic, as opposed to pre-pandemic, is many of these consumers had access to extra funds — whether it was through government stimulus packages or increased unemployment benefits,” Wise said. “Furthermore, the availability of forbearance programs allowed consumers to pause payments on some debt obligations, such as a mortgage or auto loan, and they could then pay down debt on other products such as a credit card balance with their excess liquidity.”

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Wise elaborated to say that economic data from the Bureau of Labor Statistics shows lower-income borrowers have seen the greatest percentage increase in wages over the past year, surpassing the level of inflation.

“For low-income borrowers, many of whom may have below prime credit scores, the recent wage gains have been a benefit to their ability to service their debts,” he said.

What Type of Debt Is Most Sensitive to Inflation?

Asked what type of debt is most sensitive to inflation, Wise said that typically, it’s credit card debt — for several reasons.

“Because it is the product most readily used to make purchases and to access cash, we see card balances often rise during inflationary periods or other times when consumer cash flow becomes constrained,” Wise said. “It is also a product type that consumers are more likely to go delinquent on first when they face financial hardship. We have done multiple payment hierarchy studies where we have demonstrated that consumers, when facing financial hardship, prioritize mortgage, auto loan and often personal loan payments ahead of credit card payments.”

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In terms of what’s next, there is good news for credit cards, TransUnion said, as the high inflation model it used shows that non-prime borrower consumer delinquency rates for credit cards would only rise to 8.38% in Q1 2023 from the current 8.02% in Q1 2022.

“While well above lows observed in Q1 2021 when consumers were receiving significant government financial support, it is still significantly lower than the pre-pandemic Q1 2020 rate of 9.24%,” the study read, in part.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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