Inflation begins to strain the finances of young, low-income Americans

Photo of a shopper wearing a face mask at the Dollar Tree store in Pasadena, California, US, June 11, 2020. REUTERS/Mario Anzoni

NEW YORK (Reuters) – As high inflation forces Americans to spend more on gas and bills, young, low-income consumers are beginning to feel the financial strain.

Generation Z consumers and those with low credit scores are falling behind on credit card bills and car loans and accumulating credit card debt at a pace not seen since before the pandemic.

For example, credit card balances for people 25 and younger rose 30% in the second quarter from a year earlier, compared to an increase of just 11% in the general population, according to a random sample of 12.5 million US credit files compiled by a company VantageScore credit score. The balances of non-primary borrowers, or people with credit scores below 660, have risen about 25% over the same period.

For months, things have been looking good for US consumers, their bank accounts lined with government incentives, student loan takeouts and pandemic-era savings. Bank executives have consistently said consumers have healthy fiscal cushions and spend money despite rising inflation and a slowing economy. Read more

Silvio Tavares, president and CEO of VantageScore, said there are now signs that some Americans have overextended their finances from traveling and dining out while paying off less debt on their credit cards. This contrasts with consumers’ inclinations to repay loans and be more frugal during the pandemic’s first year, according to Federal Reserve data.

“The consumer is strong, their balance sheets are strong, and the debt repayment history is strong compared to historical averages,” Tavares said. “However, there are areas of concern. Number one among them is that consumers are adding leverage.”

Federal Reserve Chairman Jerome Powell said time is running out to bring down inflation, which is hovering at levels not seen since the 1980s. Read more

Data released on Thursday showed US consumer spending growing at the slowest pace in two years, as the economy unexpectedly contracted in the second quarter. Read more

Those higher prices are causing consumers to cut back on discretionary spending, according to retail and consumer companies such as Walmart Inc. (WMT.N) and Tide-maker Procter & Gamble Co (PG.N), which lowered the forecast for sales growth over the past week. Read more

Rising, accelerating rates may exacerbate financial stress among young people and borrowers with lower credit scores, and VantageScore found that among non-primary borrowers, the percentage of credit cards and auto loans that were past due by more than 30 days also rose, Tavares said. The data showed that credit card delinquency rates are now back to pre-pandemic levels for young people and non-primary borrowers.

While delinquency rates aren’t a cause for concern yet, Tavares said, “it’s definitely something to watch.”

“You can get a little bit of a canary in a coalmine effect. If it happens with one group, sometimes it can spread to another.”

TransUnion, one of the Big Three consumer credit rating agencies, estimates that credit card delinquency rates could rise to 8.4% in the first quarter of 2023, up from 8% in the first quarter of this year, if inflation remains high. Read more

The average debt held by a non-primary client was $22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. That’s up from $22,461 a year earlier, and $22,970 in the first quarter of 2020, before the pandemic began in the United States.

Auto loans make up a large portion of this debt, as demand for cars rose in 2021 in the United States, driving up the price and term of auto loans. Read more

An executive at a large US auto lender that works with many non-core consumers said demand has upended the principle that a car loses value once it leaves the dealer.

The executive, who asked not to be named in discussion of non-public information, said customers who are 90 days late repay their loans in full frequently. This suggests borrowers are taking advantage of high car prices to sell their car, rather than seeing it repossessed.

Currently, auto loan defaults are still lower than they were before the pandemic, the executive said.

“We think things will get back to normal – we all expected it – but will things get any worse than usual? That is the question.”

credit quality

Another peculiarity of the current US economy is that the average credit score has risen above the pandemic, as a result of consumers spending less and paying debts.

VantageScore averaged 697 at the end of June, up 13 points from January 2020.

Bank of America, the second largest US bank by assets, recently stated that the average credit score of its clients was 771.

For younger, lower-income consumers who more quickly feel the effects of price shocks caused by inflation, these credit gains may be weak if they continue to accumulate credit card debt.

“Any new customers — or new customers in credit — are riskier,” said Moshe Orenbusch, an analyst at Credit Suisse who studies bank loan portfolios. “A lot of that growth (in debt) is replacing the balances that people paid in the early part of COVID.”

(Reporting by Elizabeth Dilts Marshall) Editing by Lisa Shumaker

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