Americans rely on loans to cover expenses, says the report

Red hot inflation is on the minds of many consumers as they struggle to manage rising costs. For some, the solution is simple: pay with plastic.

According to a new release by TransUnion Quarterly Credit Industry Insights Report (CIIR), credit card balances remained near a record high of $917 billion, representing a year-over-year increase of nearly 20%. Delinquencies remained flat, but higher than in the first quarter of 2022.

“We see record levels of originations of credit cards and unsecured personal loans since mid-2021 as strong credit positions allow consumers to access more product,” said Michele Raneri, vice president of US research and consulting for TransUnion. “As inflation rose to near 40-year high levels, many consumers used credit to help manage their budgets, leading to record—or near-record—high balances.”

A flip in consumer behavior and high inflation created the perfect storm

During the height of the pandemic, consumers were paying off debt at record levels — with many Americans seeing even an improvement during that time thanks to increased debt repayments and savings. In fact, the average FICO credit score reached a record high of 716 in April 2021.

“During the pandemic, people are paying a lot more on their bills. Their balances are very low…there’s not as much people can buy and we’re locked out,” said Michele Raneri, vice president in research and consulting in the US for TransUnion. “And I think that the adjustment of the behaviors when they come out of the pandemic, that people are enjoying some things that they haven’t done for a while, and now when those balances continue to increase, and the people haven’t found a happy medium between the two, balances will be higher and interest rates will be higher than before.

For context, the average credit card APR is hit 20.09% in the first quarter of 2023which compares to 14.56% in the first quarter of 2022 and 14.75% in 2021. Interests on personal loans also increased from 9.39% at the beginning of 2021 to 11.48% in the first few months of 2023.

And, despite a slight increase in the cost of everyday items shown in the latest Consumer Price Index (CPI), prices are still up 5% from the same period last year, according to the US Bureau of Labor Statistics.

The TransUnion report also found that higher interest rates hurt 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 continues to accelerate, from $2.9 million in Q4 of 2021 to $1 million in Q4 of 2022 — a a 65% decrease year-over-year. and the largest decline since TransUnion has tracked this data. Personal loan originations saw a 9% year-over-year decline in Q4.

Raneri says the growing balance sheets are not solely to blame. Rising balances and delinquencies can make lenders wonder who they are doing business with. For borrowers with low credit scores, this can be a cause for concern.

“We’re seeing a slight increase in primary or primary and above derivatives,” Raneri said. “It’s a little bit of a change that we’re seeing somewhere [lenders] did not carry as much or approve as many say subprime or near prime people. It’s not strong, but it’s a shift, and I think it’s a response to the delinquencies they’re seeing rather than the balances 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 continue to manage your debt balances so that your credit score is not affected and affects your ability to borrow in the future.

  • Review your monthly spending. This one probably goes without saying, but it’s easy to lose track of how much you owe if you don’t hand over physical cash and don’t regularly check your credit card balance. Be sure to monitor your balance and set alerts to help you control your spending. You also need to be clear monthly budget which tells you how much you bring in each month, how much you spend, and how much you can comfortably afford.
  • Be diligent about paying your balances and not carrying high interest debt. High balances paired with high interest rates can make things even more difficult eliminate your loan 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 your options. If you need to get new credit, actively look for the lowest possible interest rate. Think carefully about what you use credit for. Say you want to finance an expensive home improvement—you might consider a different type of credit product like a home equity loan or home equity line of credit as opposed to a traditional credit card if you have built enough equity in your home.

The takeaway

Credit can be a valuable tool for hitting some of life’s most expensive milestones, but a growing balance and delinquencies can work against you and seriously affect you now and in the future. Think about your credit usage and if you know you can’t get your debt under control, don’t be afraid to seek out a financial pro for guidance.

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