Study: Rising Inflation Impacting Non-Prime Borrowers Most; Consumers Proving Resilient

CHICAGO (Globe Newswire) — As rapidly rising gasoline, energy and utility prices, among other factors, drive inflation to levels not seen since the 1980s, non-prime borrowers – those consumers with the riskiest credit profiles – have generally experienced the greatest impact to their wallets.

A new TransUnion study, “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 study was featured at this week’s 2022 TransUnion Financial Services Summit, which is attended by hundreds of executives from across the country.

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.

Furthermore, 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
The study found that 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. 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.

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.

Despite the rise in debt obligations, 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. Nearly three in 10 subprime borrowers are now making monthly payments in excess of the minimum due, a marked rise from Q1 2020.

“Making on-time payments and keeping credit utilization rates relatively low are key factors in credit score calculations. While challenges abound for consumers in the current inflationary environment, it is heartening to see borrowers, especially those in the riskiest credit categories, make an effort to pay down more of their monthly payment obligations,” said Margaret Poe, head of consumer credit education at TransUnion. “Building a foundation of sound financial and credit habits and practicing them consistently are the keys to long-term credit health.”

Delinquency Rates Rising
As 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.

Elevated inflation also appears to have negatively impacted payments of credit cards – the most widely used credit product. 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%.

“It is not surprising to see a rise in credit card delinquencies, especially when considering many younger consumers have not experienced either high inflation or rising interest rates in their adult lives. As consumers become more aware of the impact of inflation on their cost of living and adjust their behaviors accordingly, we could see these recent delinquency increases stabilize. At the same time, it is important to keep in mind that, even with these recent increases, overall delinquency levels for most products remain below pre-pandemic levels,” added Wise.