Red hot inflation has been at top of mind for many consumers as they struggle to manage rising costs. For some, the solution is simple: paying with plastic.
According to TransUnion’s newly released Quarterly Credit Industry Insights Report (CIIR), credit card balances remain near record highs at $917 billion, which represents nearly a year-over-year increase of almost 20%. Delinquencies remained flat, but still higher than they were in the first quarter of 2022.
“We have seen record levels of originations in credit cards and unsecured personal loans since mid-2021 as strong credit positions have allowed consumers access to additional products,” says Michele Raneri, vice president of U.S. research and consulting for TransUnion. “As inflation rose to near 40-year high levels, many consumers have used credit to help manage their budgets, leading to record- or near-record high balances.”
A flip in consumer behavior and elevated inflation are creating the perfect storm
During the height of the pandemic, consumers paid down debt in record levels—with many Americans even seeing an improvement during that time thanks to increased debt payments and savings. In fact, the average FICO credit score hit a record high of 716 in April 2021.
“During the pandemic, people were paying their bills really well. Their balances were unusually low…there wasn't as much that people could purchase and we were locked down,” says Michele Raneri, vice president of U.S. research and consulting for TransUnion. “And I think that adjusting those behaviors as they came out of the pandemic, that people were kind of enjoying some of the things that they didn't for a while, and now if those balances continue to increase, and people don't find a happy medium between those two, balances are going to get higher and interest rates are higher than they used to be.”
For context, the average credit card APR hit 20.09% in the first quarter of 2023, that’s compared to 14.56% in the first quarter of 2022 and 14.75% in 2021. Personal loan interest rates have ticked upward as well from 9.39% at the beginning of 2021 to 11.48% within the first few months of 2023.
And, despite a smaller increase in the cost of everyday goods shown in the latest Consumer Price Index (CPI), prices are still up 5% from the same period last year, according to the U.S Bureau of Labor Statistics.
TransUnion’s report also found that higher interest rates have taken a toll on mortgage and personal loan originations. Total mortgage balances reached a record level of $11.8 trillion in Q1 of 2023, but the slowdown in mortgage originations continued to accelerate, down from $2.9 million in Q4 of 2021 to $1 million in Q4 of 2022—a 65% year-over-year drop and the largest decline since TransUnion has been tracking this data. Personal loan originations saw a 9% decrease year-over-year in Q4.
Raneri says growing balances aren’t solely to blame. An increase in balances and delinquencies could make lenders think twice about who they do business with. For borrowers with less than stellar credit scores, this could be cause for concern.
“We are seeing a slight increase of prime or prime and above originations,” says Raneri. “It's a slight change that we're seeing where [lenders] are not bringing in as many or approving as many say subprime or near prime people. It's not drastic, but it's a shift, and I think it's more of a response to delinquencies that they are seeing than to the balances that they're seeing.”
How consumers can protect their credit score and financial health
Ultimately, the best way to protect your financial health and future is to keep a handle on your debt balances so that your credit score doesn’t take a hit and impact your ability to borrow in the future.
- Review your monthly spending. This one probably goes without saying, but it can be easy to lose track of how much debt you’re racking up when you aren’t handing over physical cash and aren’t regularly checking your credit card balance. Make sure to keep tabs on your balance and set alerts to help you keep your spending in check. You should also have a clear monthly budget that tells you how much you’re bringing in each month, how much you’re spending, and how much you can comfortably afford to repay.
- Be diligent about repaying your balances and not carrying high-interest debt. High balances paired with high interest rates can make it increasingly difficult to eliminate your debt balances. One of the most efficient ways to do this is to make more than the minimum payment on your credit card or loan balance. The smaller your balance, the less you’ll pay in interest over time.
- Shop around for the best rate and consider all of your options. If you must take on new credit, actively seek out the lowest possible interest rate. Think carefully about what you’re using that credit for. Say you want to finance a costly home improvement—you might consider a different kind of credit product like a home equity loan or home equity line of credit as opposed to a traditional credit card if you’ve built up enough equity in your home.
The takeaway
Credit can be a valuable tool for hitting some of life’s most expensive milestones, but growing balances and delinquencies can work against you and severely impact you now and in the future. Be mindful of your credit usage and if you find that you’re unable to get a handle on your debt, don’t be afraid to seek out a financial pro for guidance.
