May 15th, 2023 7:00am PDT
(PenniesToSave.com) – There is a concerning trend emerging as more and more individuals find themselves in financial hardship, particularly those who are considered high-risk borrowers. Reports indicate that meeting credit card and personal loan obligations has become increasingly challenging for these individuals.
A recent report by the Federal Reserve Bank of New York revealed a 0.6 percentage point increase in the “delinquency transition rate” for credit card debt during the first quarter of this year. The delinquency transition rate signifies the proportion of credit card debt that is overdue by 30 days or more.
The first-quarter report from TransUnion, a credit bureau, supports these findings. It shows that delinquency rates for both credit cards and unsecured personal loans have increased compared to the previous year.
As missed payments continue to rise, lenders are reevaluating their previously lenient lending requirements. However, they have not implemented a common practice used during recessions of reducing credit limits.
Lending Surges as Credit Card Balances Reach Record Highs
Recent reports show a notable surge in lending activity. Credit card balances have remained near or at record highs, as reported by TransUnion, with a year-over-year growth of almost 20%. The New York Federal Reserve’s report also indicates an 18% annual increase. Both sources reveal that the total outstanding balances have reached just below $1 trillion by the end of the first quarter.
Furthermore, TransUnion reports that unsecured personal loan balances have surged to an unprecedented $225 billion, marking a remarkable 26.3% increase compared to the previous year.
The increase in both account balances and delinquencies is causing worry, especially for consumers with higher levels of risk. Charlie Wise from TransUnion believes that these individuals may be experiencing potential financial distress due to factors such as rising inflation, increased financial burdens, and higher interest rates.
In the first quarter, the number of borrowers with a balance on their credit card increased by 10%, totaling 165 million. This is compared to 150 million during the same period in 2021. Furthermore, the number of individuals with a personal loan rose by almost 18%, reaching 22.4 million from 19 million during the corresponding timeframe.
During a period of instability in the regional banking industry, many banks have made adjustments to their lending criteria for credit card, auto, and other consumer loans. The Federal Reserve conducted a survey of senior loan officers, which revealed this trend. However, despite these changes in lending requirements, TransUnion reports that the average credit limit on new credit cards has increased to $5,421 in the third quarter, up from $5,226 last year. Additionally, personal loan balances reached a record high of $11,281 during this quarter. Furthermore, the average size of new personal loans rose by nearly 11% to $7,368 compared to the previous year.