The higher your credit rating, the more likely you are to feel good about the current state of credit. That is a key takeaway from TransUnion’s Q3 2023 Quarterly Credit Industry Insights Report.

Higher interest rates and inflationary pressures are driving many to tap existing credit lines more than ever. Affordability challenges and higher debt service costs have dampened new account openings.

Bank card balances are within sniffing distance of the $1 trillion threshold. They surged 15% YOY to $995 billion at Q3’s end. The average balance per consumer is up 11% to $6,088, the highest in a decade. Millennials have surpassed Baby Boomers as the second-greatest generational balance share behind Generation X.

“Inflation has abated to a large extent in recent months, but its elevated levels in 2021 – 2022 have left overall prices sharply higher across a wide range of products and services – not just discretionary spend categories, but everyday items that consumers rely on,” said Charlie Wise, senior vice president of global research and consulting at TransUnion. “Consequently, consumers have increasingly turned to their existing available credit lines. It will be worth watching how those balances are further impacted as some consumers begin feeling the pinch of the resumption of student loan payments.” 

Unsecured personal loan borrowers roughly represent 13% of all student loan borrowers. More than half, 56%, of unsecured personal loan borrowers with a student loan are below prime.

Student loan resumption has some feeling the pinch

Fintechs have 45% of unsecured personal loan borrowers with a student loan. However, the highest repayment rate was for those who borrowed from a bank. Unsecured personal loan borrowers are more likely to be delinquent on their debt.

While more than half of unsecured personal loan borrowers with student loans have aggregate excess payment amounts below $300, nearly half of unsecured personal loan borrowers are left without any excess capacity (after accounting for the expected repayment shock).

TransUnion SVP of consumer lending Liz Pagel said proper consumer education would help those at risk avoid some debt stress. The Biden Administration mandated that student loan delinquencies go unreported for a year.

“That would mean the student loan would be at the bottom of the payment hierarchy, below anything that’s reported to the bureau,” Pagel said. For everything that hits the credit report, you would imagine that the perfectly informed consumer pays all those things off and would go delinquent first on their student loan.

“Does that message make it to everybody? When we work with lenders and with fintechs, it’s a lot of discussion around how you educate the consumer and help them understand that the delinquency won’t be reported.”

Pagel suggests financial institutions meet with customers to review their accounts and educate them about the debt hierarchy. Provide resources and information on helpful programs.

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Lenders seek lower credit risk

While most credit product balances are higher, originations are behind their 2022 levels. Mortgage originations plunged 37%, and refis have stalled. Unsecured personal loan originations are down 15%.

Prompted by two years of rising unsecured delinquencies, lenders seek less risky credit tiers when seeking originations. Super-prime bank card originations represented 22.5% of all originations in Q2, up from 18.6% one year ago. Subprime’s share dropped from 24.1% to 20.7%. Subprime unsecured personal loan origination rates fell as super-prime and prime-plus’ shares rose.

Bank card credit lines are up 9% YOY to $4.6 trillion, and the average credit line per consumer topped $25,000.

“Q2 2023 showed another historically strong quarter for bank card originations, though lower than last year’s record level, as lender acquisition strategies shifted away from below prime originations for the third consecutive quarter,” TransUnion SVP and credit card business leader Paul Siegfried said. “In contrast, the bankcard origination share for prime-plus and super -rime are up from one year ago, indicating a shift by lenders to focus on acquiring lower-risk new accounts. 

“Despite the year-over-year drop, near-record origination levels show that card issuers have continued to meet the demand of credit-seeking borrowers. While still reflecting some familiar seasonal patterns, balance-level bankcard 90+ DPD delinquency now stands at its highest level over the past decade and bears continued monitoring.”

Originations down, balances up

Total unsecured loan balances rose to $241 billion in Q3, the eighth-consecutive record-setting quarter. YOY growth was 15%, with super-primes growing 38.6%. Only the super-primes saw average new account balances grow, which they did at a healthy 22% clip. The $11,692 average balance was also a record. While originations were down, they remain 6% higher than pre-pandemic levels.

“Although originations continue to fall from 2022’s record levels, total unsecured loan balances and consumer-level balances still reached records, driven primarily by super prime consumers, representing a continued shift by lenders towards less risky borrowers,” Pagel said. “While originations in Q2 2023 were down 14.5% from last year, they remain elevated compared to the pre-pandemic period, demonstrating continued demand in this market. Sixty-plus DPD delinquencies saw their first year-over-year decline in borrower-level delinquency in over a year, led by improvement in the performance of originations by below-prime borrowers. 

“This is something worth watching in the months to come as we look for potential impacts of restarting student loan payments for millions of borrowers.”

Fintech originations plunging

Fintechs are feeling the market changes. Their share of originations has plunged, with banks picking up the gains. Fintech’s share of new account balances is down to 42% from 54% one year ago.

Pagel said fintechs historically are both faster to pull back and to return to the market. They’re more nimble.

“But they have to find funding for the loans,” she added. “The appetite for securitization of loans for investors and loans… that market is waiting on the sidelines for some signal that things are going well, that inflation is going down, and that the economy is in a good place. 

“There’s no red flags with personal loan consumers. But I think there’s just enormous uncertainty in the market. So, a lot of us are sitting on the sidelines. That’s why banks are in a little better position with their balance sheets to take share right now.”

What of the lower credit tiers?

While things are more challenging for those in the lower credit tiers, Pagel said the market is still moving. Deep subprime lenders are still underwriting. Some are growing. There’s no across-the-board deterioration.

“The lenders have put more controls and tightened,” Pagel said. “There’s just not as much appetite across the industry from investors or lenders for risky credit.

“But right now, we’re still a positive story in consumer lending, and the lenders are open for business growth in their portfolios. Just at a more conservative level.”

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