Inflation begins to pressure the funds of younger, low-income People

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

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NEW YORK, August 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 pressure.

Generation Z consumers and those with low credit scores are falling behind on credit card bills and auto loans, and accumulating credit card debt at a rate not seen since before the Great Depression. Translate.

For example, the credit card balances of people 25 and younger grew 30% in the second quarter from a year earlier, compared with an increase of just 11% in the broader population, according to a random sample of 12.5 million US credit records aggregated. by credit score company VantageScore. Balances of non-premium borrowers, or those with credit scores below 660, have increased by nearly 25% over the same period.

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For months, things were looking good for American consumers, whose bank accounts were stuffed with government stimulus, a ban on student loans and savings during the pandemic. Banking executives have consistently said consumers have a healthy financial cushion and are spending money despite high inflation and a slowing economy. read more

Silvio Tavares, president and chief executive officer of VantageScore, said there are now signs that some Americans are overspending their finances from traveling and eating out while paying off their credit card debt. their credit. That contrasts with the trend of consumers wanting to pay off loans and save more during the first year of the pandemic, according to Fed data.

“Consumers are strong, their balance sheets are strong, and their repayment history is relatively strong compared to the historical average,” says Tavares. “However, there are areas of concern. One of them is that consumers are adding more leverage.”

Federal Reserve Chairman Jerome Powell said the clock is running out to reduce inflation, which is fluctuating at levels not seen since the 1980s. read more

Data 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

According to retail and consumer companies like Walmart Inc. (WMT.N) and Tide-maker Procter & Gamble Co (PG.N), which has slashed sales growth forecasts for the past week. read more

According to VantageScore, rapidly rising prices can exacerbate financial stress among young people and borrowers with low credit scores. The data shows that credit card delinquency rates have now returned to pre-pandemic levels for young people and non-borrowers.

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

“You can get a little canary effect in the coal mine effect. If it happens to one group, it can sometimes spread to another.”

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 held by a non-primary customer was $22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. This is 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 significant portion of that debt, as demand for cars skyrockets in 2021 in the United States, pushing up prices and terms for auto loans. read more

An executive at a major US-based auto loan company that works with many non-primary consumers said that demand has outstripped the maxim that a car will depreciate as soon as it leaves the dealer.

The CEO said customers who become 90 days past due regularly pay off their loans. That shows that borrowers are taking advantage of the high car value to sell their car, instead of seeing it being repossessed.

Currently, delinquent auto loans are still lower than they were before the pandemic, the executive said.

“We think things will get back to normal – we all expect that – but will they get worse than usual? That’s the question.”

CREDIT QUALITY

Another feature of the current US economy is that the average credit score has increased due to the pandemic, a result of consumers spending less and paying down debt.

VantageScore’s average score was 697 at the end of June, 13 points higher than January 2020.

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Bank of America, America’s second-largest bank by assets, recently reported that its customers’ average credit score was 771.

For the youngest and lowest-income consumers, who quickly feel the effects of inflation-driven price shocks, those credit boosts could turn out to be useless, experts say if they continue to have credit card debt.

“Any new customer – or new customer to credit – is at higher risk,” said Moshe Orenbuch, an analyst at Credit Suisse who studies banks’ loan portfolios. “Much of that growth (debt) is displacing the balance that people were paying down in the early days of COVID.”

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Reporting by Elizabeth Dilts Marshall; Edited by Lisa Shumaker

Our standards: Thomson Reuters Trust Principles.

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