A recent report has highlighted a concerning trend among subprime borrowers who experienced credit score improvements due to pandemic-related stimulus savings. These borrowers are now showing signs of reverting to problematic payment habits, indicating a shift in their financial behavior.
The confluence of factors such as government pandemic relief measures, unemployment benefits, and reduced credit usage during COVID-19 lockdowns led to a collective increase of approximately $2.3 trillion in savings among Americans. This surplus, coupled with initiatives like pandemic-era forbearance programs that temporarily paused federal student loan payments, resulted in decreased delinquencies and enabled individuals to remain current on their financial obligations, consequently bolstering their credit scores. This positive trend was evident in the TransUnion report.
However, the situation is changing for some subprime borrowers. Their elevated credit scores, which were achieved during the period of stimulus support, might now inaccurately represent their current capacity and willingness to meet financial commitments. The discontinuation of government stimulus programs and the impact of inflation on savings have contributed to this shift in behavior.
The TransUnion report observed that a significant number of these borrowers, who had moved into higher credit score categories, are now displaying delinquency rates consistent with their previous lower credit scores. In certain instances, the rate of delinquency for these borrowers aligns more closely with individuals who had credit scores 25 points lower prior to the pandemic.
Michele Raneri, Vice President and Head of U.S. Research and Consulting at TransUnion, emphasized the efficacy of credit scores in assessing borrower risk. She underscored the role that pandemic relief programs played in temporarily enhancing credit scores for many consumers, particularly those who previously struggled with delinquent accounts or high credit utilization.
Raneri advised lenders to adopt a comprehensive approach when evaluating the credit behavior of these borrowers who experienced score increases. She recommended leveraging data-driven insights to analyze additional trended credit behaviors, allowing lenders to differentiate between those likely to sustain their improved positions and those prone to reverting to their previous credit score levels.
For individuals grappling with debt repayment challenges, exploring options such as personal loans for consolidating payments at lower interest rates could provide financial relief. Platforms like Credible offer the opportunity to assess personalized interest rates without negatively affecting credit scores.
Surging Personal Debt Amidst Credit Improvement
The improved credit scores experienced by subprime borrowers have translated into heightened access to various lending products, as highlighted by TransUnion.
“Amidst this landscape of elevated credit scores, the resurgence of consumer credit demand commenced in mid-2021, coinciding with the conclusion of several government aid programs and the onset of inflation,” the report noted. “Particularly robust was the demand for credit cards and personal loans, both of which offer immediate financial liquidity to consumers. Concurrently, lenders displayed an increased willingness to extend these credit offerings.”
A distinct TransUnion report indicated that credit card balances reached a staggering $917 billion during the initial quarter of 2023, marking a nearly 20% surge from the previous year. Furthermore, the average balance per individual increased by 14.4% year-over-year, reaching $5,733.
In the same vein, unsecured personal loan balances exhibited a significant rise of 26.3% year-over-year during the first quarter of 2023, attaining a new pinnacle of $225 billion. The average loan quantum per borrower escalated from $9,896 to $11,281 compared to the preceding year.
For individuals considering the possibility of acquiring a personal loan, utilizing online marketplaces to compare multiple options simultaneously could prove beneficial. Platforms such as Credible offer the convenience of assessing personalized interest rates without any impact on one’s credit score.