The numbers on consumer debt have been somewhat skewed in the past two years. Home-based workers spend differently than employees commuting to work. Many remote workers with lower expenses used savings to pay off debt, causing a $40 billion reduction in total credit card debt in the U.S. For a brief period, we were going in the right direction.
As we enter 2022, home prices have been skyrocketing, but interest rates have remained low, leading to increased home sales. Mortgage debt hit $17.6 trillion in 2021, by far the highest number of all types of debt. That escalation is expected to continue, even with projected interest rate hikes from the Federal Reserve Bank later this year. ย
Credit-Hungry Lenders are Adjusting Their Strategies
Increased home values create more equity for borrowers looking for secured home equity loans and HELOCs. That further drives down the numbers for personal unsecured loans and credit card debt, a boon for consumers, but a setback for lenders who are hungry for new customers. The trend has resulted in more programs to attract subprime borrowers.
Auto loans, credit cards, and unsecured personal loans are easier to get now than theyโve been in years. Itโs a simple matter of supply and demand. Cost-conscious Americans responded to the economic crisis of the pandemic by reducing their unsecured debt. Lenders want those numbers to go back up, so theyโre making it easier to borrow.
Despite the temporary setback of the omicron variant and rising inflation, there was a surge in credit card applications at the end of last year. Octoberโs numbers exceeded pre-pandemic levels, another indicator that consumer debt will increase in 2022. TransUnion is forecasting 116 million new unsecured credit accounts in 2022. There were 92 million in 2020.
BNPL Wonโt Slow Down Credit Card Spending
Retailers increased their usage of buy now pay later (BNPL) programs during the pandemic because they had a captive audience dependent upon online buying. The system was successful in capturing Millennial and Gen-Z consumers, but it didnโt slow down credit card usage for long. As the reopening continues, credit card spending is going up again.
Millennials represent 32.7% of all credit card holders. Gen-Z adds another 14%, so nearly 50% of all credit card spending comes from the generations with the greatest affinity for BNPL. Offering 0% interest helps, but it appears that the inconvenience of budgeting for multiple payments doesnโt overcome the familiar behavior of using a credit card.
Auto Lenders are Challenged by Supply Chain Issues
Auto loans are the one segment of consumer credit that have remained flat. TransUnion is forecasting 28.8 million new auto loans in 2022, up just 2% from last year. Thatโs due in part to supply chain issues, namely a shortage of semi-conductor chips needed for auto manufacturing. Consumers donโt want to buy automobiles that arenโt on the lot yet.
Though the number of loans isnโt going up significantly, the amounts of those loans are. According to Kelly Blue Book, the average price for a new car topped $46,000 last year, and many consumers are paying above sticker price because vehicles are on back-order. With the manufacturing delays, used car prices remain high also. ย ย ย ย ย ย ย ย
Final Note: Inflation Will Make These Numbers Go Up
Itโs difficult to compare consumer debt from year to year when inflation is rising. The numbers in this article are based on the Fedโs prediction that there will be three interest rate hikes this year of a quarter point each and that inflation projections are accurate. The consumer price index hit 7% in December. Take that into account when you do the math on debt.
Increased credit usage can be a sign of a healthy economy that is emerging from one of the toughest economic periods in recent history. Lenders need to be careful though. Targeting sub-prime borrowers could backfire, particularly if thereโs a major stock market correction or new shutdowns due to Omicron. Keep an eye out for both in the upcoming months.
Article by Saad Shafiq
