CHICAGO–As inflation continues to rise,non-prime borrowers – those consumers with the riskiest credit profiles – have generally experienced the greatest impact to their wallets, according to a new study.
The study from TransUnion, “Identifying Resilient Consumers During Inflationary Times,” found that non-prime borrowers have seen the greatest percentage rise in both credit balances and delinquency rates since early 2021, which coincides with the period when inflation has risen significantly, the company noted.
“While the study pointed to the impact of inflation on consumer wallets, it also 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,” TransUnion said.
Furthermore, the company noted the study found that even though credit balances are rising, more consumers are making payments each month over their minimum due amounts, an indication of consumer resiliency.
“Inflation is expected to remain high through at least the end of 2022. Its impact on consumer wallets is clear – balances are rising and we are seeing an uptick in delinquency rates,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. “Our study determined that consumers in varying credit risk tiers and with different product types will face unique impacts. One of the key conclusions from 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. Furthermore, consumer credit markets will likely see more positive credit behavior once inflation abates.”
Credit Balances Growing For All
TransUnion reported the study found a combination of factors has likely led to higher consumer balances for non-mortgage lending products.
“First, lending has recovered to more ‘normal’ conditions following a slowdown at the beginning of COVID-19,” TransUnion said. “Second, higher prices for consumer goods and services, including not only daily household purchases but also larger-ticket categories like automobiles and home renovations, has increased new loan amounts and has helped push up consumer balances.”
Average Non-Mortgage Balance per Consumer Increasing Again After Dropping During Early Stages of Pandemic
| Borrower Types/Timeframe | Q1 2020 | Q1 2021 | Q1 2022 |
| Non-Prime* | $22,970 | $22,461 | $22,988 |
| Prime and Above** | $18,831 | $18,997 | $19,482 |
*VantageScore 4.0 risk range of 300-660; **VantageScore 4.0 risk range of 661-850
Consumers also are experiencing an increased debt service burden each month for both non-revolving (e.g. auto and personal loans) and revolving (e.g. credit cards) accounts, according to TransUnion.
“Average monthly minimum payment due amounts on revolving accounts for non-prime consumers have increased to $194 in Q1 2022 from $182 in Q1 2021; non-revolving monthly payment due amounts have risen to $557 from $513 over the same period,” the company reported. “Prime and above consumers have only seen a marginal rise in revolving monthly payments due (up to $143 in Q1 2022 from $137 in Q1 2021) with a more pronounced rise in non-revolving monthly obligations ($954 from $905 in the same timeframe).”
Despite the rise in debt obligations, TransUnion said the study found that more consumers were making excess payments in Q1 2022 than they were pre-pandemic, particularly those in below prime risk tiers.
“Interestingly, subprime borrowers saw the greatest improvement in this regard,” TransUnion stated, noting nearly three in 10 subprime borrowers are now making monthly payments in excess of the minimum due, a marked rise from Q1 2020.
Serious Delinquencies Rise
Meanwhile, TransUnion also reported thatas debt obligations increase from pandemic-era lows, the study also determined that serious delinquency rates have risen in the last year for both revolving and non-revolving debt. The rise in delinquencies has occurred as the inflation rate hit a nearly 40-year high at the beginning of 2022, the study found.
As Inflation Has Increased Over the Past Year, So Have Serious Delinquency Rates
| Borrower Types/Timeframe | Q1 2020 | Q1 2021 | Q1 2022 |
| Annual Inflation Rate | 1.5% | 4.8% | 8.5% |
| Revolving 90+ DPD | 2.6% | 1.6% | 2.0% |
| Non-Revolving 60+ DPD | 3.6% | 2.2% | 2.3% |
“Elevated inflation also appears to have negatively impacted payments of credit cards – the most widely used credit product,” according to TransUnion. “Consumers with recent card originations entered early default at a higher level compared to 2019. For instance, 8.53% of subprime borrowers with VantageScore 4.0 scores between 580-600 who opened a credit card in October 2021 became 30+ days past due on their account three months after origination. For October 2019 originations, this rate was 6.92%.
The company added that it is important to keep in mind that, even with these recent increases, overall delinquency levels for most products remain below pre-pandemic levels.
What’s Next?
TransUnion said it has developed a forecast model to observe the impact of high, baseline/expected and low inflation scenarios over the next year through Q1 2023. The baseline and high inflation scenarios are based on a forecast provided by Oxford Economics. In all of the scenarios, the inflation rate would decline from 8.5% in Q1 2022 to a lower level in Q1 2023 – 5.68% (high); 3.58% (baseline/expected); and 1.48% (low), according to the company.
“For credit cards, the good news is that the high inflation model 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,” TransUnion said. “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%.
“Unsecured personal loan delinquencies appear sensitive to higher inflation across all risk tiers, with delinquency under the high inflation scenario slightly above the pre-pandemic Q1 2020 level, whereas under the baseline inflation scenario, forecast delinquency rates are roughly the same as in Q1 2020,” TransUnion continued. “For auto loan borrowers, only the below prime risk tier is sensitive to higher delinquencies under the high inflation scenario.”
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