Inflation begins to affect the finances of young low-income Americans

A shopper wearing a face mask at a Dollar Tree store in Pasadena, California, U.S., June 11, 2020. REUTERS/Mario Anzuoni

NEW YORK, Aug 1 (Reuters) – As high inflation forces Americans to spend more on gas and bills, young and low-income consumers are starting to feel the financial strain.

Gen Z consumers and those with low credit scores are falling behind on credit card and auto loan bills and racking up credit card debt at a rate not seen since before the pandemic.

For example, credit card balances for people age 25 and younger increased 30% in the second quarter from a year earlier, compared with an increase of just 11% among the general population, according to a random sample of 12.5 million US credit files compiled. by the credit scoring company VantageScore. Balances for subprime borrowers, or people with credit scores below 660, increased nearly 25% over the same period.

For months, things have been looking good for US consumers, with their bank accounts bloated by government stimulus, student loan forbearance and pandemic-era savings. Bank executives have consistently said that consumers have healthy financial cushions and are spending money despite high inflation and a slowing economy. read more There are now signs that some Americans have stretched their finances by traveling and dining out while paying less debt on their credit cards, said Silvio Tavares, director of VantageScore. That contrasts with consumer trends to pay down loans and be more frugal during the first year of the pandemic, according to Fed data. relative 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 has said time is running out to bring down inflation, which is hovering around levels not seen since the 1980s. Read More

Data released on Thursday showed US consumer spending grew at its slowest pace in two years as the economy unexpectedly contracted in the second quarter. read more

Those price increases are causing consumers to cut back on their discretionary spending, according to retail and consumer companies like Walmart Inc. (WMT.N) and Tide-maker Procter & Gamble Co. (PG.N), which lowered sales growth forecasts for the past week. read more

The rapid acceleration in prices could exacerbate financial strains among young people and borrowers with poor credit scores, Tavares said. Among subprime borrowers, the percentage of credit card and auto loans that were more than 30 days past due also increased, VantageScore found. Credit card delinquency rates are now back to their pre-pandemic levels for youth and subprime borrowers, the data showed.

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

“You can have a bit of a canary in a coal mine effect. If it happens with one group, sometimes it can spread to another group.”

TransUnion, one of the three major 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 of a subprime customer was $22,988 in the first quarter of 2022, not including 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 account for a significant portion of that debt, as demand for vehicles soared in 2021 in the United States, driving up the price and duration of auto loans. read more

An executive at a large US-based auto lender who works with many subprime consumers said demand has changed the maxim that a car loses value as soon as it leaves the dealership.

Clients who fall behind 90 days more often pay their loan in full, said the executive, who asked not to be identified due to non-public information. That indicates borrowers are taking advantage of high car values ​​to sell their car, rather than see it repossessed.

For now, auto loan delinquencies remain lower than they were before the pandemic, the executive said.

“We think things are going to get back to normal, we all expected that, but will they get worse than normal? That’s the question.”

CREDIT QUALITY

Another idiosyncrasy of today’s American economy is that the average credit score has risen during the pandemic, as a result of consumers spending less and paying down debt.

The average VantageScore was 697 at the end of June, up 13 points from January 2020.

Bank of America, the second-largest US bank by assets, recently said its customers’ average credit score was 771.

For younger, lower-income consumers who feel the brunt of price shocks from inflation more quickly, those credit gains may be tenuous if they continue to rack up credit card debt, experts said.

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

Information from Elizabeth Dilts Marshall; Edited by Lisa Shumaker

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