In 2022 we started to see the toll inflation and economic stressors are taking on consumer finances. Inflation remained a top concern as the Fed tried to rein it in with rate hikes, and the higher costs and interest rates may have caused consumers to stretch their budgets as far as possible (or farther – holiday spending, anyone?), leading to a precarious financial outlook in 2023. As we start the new year with the continued threat of a recession and a shrinking employment market, building strategies that take consumer situations and preferences in mind is key, and of course, finding ways to work with distressed borrowers is the best path forward.
Read on for our take on what’s impacting consumer finances, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2023.
What’s Impacting Consumers?
Compounding inflation and higher interest rates continued to be hard on consumer finances in Q4 of 2022. Inflation has been slowing, but still came in up 6.5% year over year in December, dropping 0.1% from November and driven by lower fuel costs. Food and housing inflation continue to rise at 10.1% and 8.1% annually respectively, and gasoline prices in January have already been rising. Interest rates sit between 4% to 4.25% after the latest 50 basis point rate hike, and the Fed projects raising rates as high as 5.1% (raised from a 4.6% projection in September) before ending the campaign to beat inflation.
According to Moody’s, while higher-income households saved more during the pandemic and are far less sensitive to rising prices, lower-income families are bearing inflation costs unequally and drawing down excess savings more quickly. Households earning less than $35,000 annually saw their excess savings shrink the most out of all income cohorts — their excess savings depleted by nearly 39% from Q4 2021 to Q2 2022 and was expected to run out by the end of the year.
Tasked with making ends meet and running out of savings, many consumers have turned to credit cards for extra funds. Credit card balances continued to climb for the ninth month in a row in November, up 16.9% year over year. According to Experian’s November Ascend Market Insights, there were 6.2% more open credit cards in October than there were a year prior and 11.1% more than at the end of October 2019 (pre-pandemic). Read: more credit cards with higher balances.
And many of those credit cards belong to subprime borrowers who are more financially at risk to inflationary pressures and unexpected expenses. Equifax data reported by Bankrate shows that about 3.95 million traditional credit cards had been issued to subprime borrowers (consumers with a VantageScore 3.0 below 620) in Q1 2022, jumping by 18.3% and representing an overall credit limit of $3.29 billion, compared with the same period in 2021. And those balances will get more expensive as interest rates go up. According to Bankrate, credit card rates have risen to the highest levels ever since it began measuring the data in 1985, with today’s average annual credit card rate at 19.42%.
Credit cards aren’t the only option – consumers have other ways to access credit like personal loans and home equity lines of credit (HELOC). But these products are showing similar use trends, too. TransUnion reports that as of Q3 2022, 22 million consumers had an unsecured personal loan, the highest number on record, while total personal loan balances in the same quarter continued to grow, reaching $210 billion – a 34% increase over last year. Similarly, Experian reports that HELOC balances grew by 1.5% after increasing over 9 of the last 12 months. With HELOC originations down, the increase in balances is attributable to homeowners tapping into existing lines of credit as the cost of living rises.
Higher prices didn’t stop the holiday shopping – holiday sales rose 7.6% last year despite inflation, and much of that was online. Consumers spent a record $9.12 billion online shopping during Black Friday and another record $11.3 billion on Cyber Monday. Buy Now, Pay Later (BNPL) products, which help consumers with flexible payment plans, played a big role. From Black Friday through Cyber Monday, BNPL payments through leading providers jumped 85% compared with the week before, according to the most recent data from Adobe, with corresponding BNPL revenue rising 88% for the same period.
Key Indicators and a Big Unknown
According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased by $351 billion (or 2.2%) during the third quarter of 2022. Household net worth, which showed a record loss in Q2, continued to decrease in Q3 by another $392 billion (.3%). The value of equity holdings dropped $1.9 trillion and the value of real estate held by households only increased $820 billion.
Financial pressures mean consumers have less, if any, to save. The U.S. savings rate fell to a 17-year low in October, with the personal savings rate as a share of disposable income dropping to 2.3%. The latest Paycheck-to-Paycheck Report from PYMNTS and LendingClub shows that in November 2022, 63% of U.S. consumers were living paycheck to paycheck, a 3% rise from October. Spending more and saving less means many Americans may be at risk for financial hardship in 2023.
Unsurprisingly, delinquencies are on the rise. According to Experian’s November Ascend Market Insights, there have been increases in 30+ days past due unit delinquency rates for six consecutive months, with those accounts showing a 3.28% increase month over month in October. This goes for both early-stage delinquencies, which are nearing or exceeding pre-pandemic levels for automobiles and unsecured credit products, and 90+ days past due delinquencies for auto and personal loans (higher than pre-pandemic). Experian’s data on overall roll rates also show that 1.32% of consumer accounts rolled into higher stages of delinquency in October 2022, representing the highest level of that metric since February 2020.
But delinquencies haven’t peaked yet. TransUnion’s 2023 forecast, based on its latest Consumer Pulse Study, projects that both credit card and personal loan delinquencies will rise in 2023 from 2.1% to 2.6% and 4.1% to 4.3% respectively. If those projections come to bear, it would represent a 20.3% year-over-year increase in delinquent accounts. According to the report, Americans took out a record $87.5 million in new credit cards and $22.1 million in personal loans in 2022.
The big unknown around student loans will impact many consumers for better or worse. As President Biden’s student loan forgiveness program meets legal challenges, tens of millions of Americans wait to see what it means for them. If successful, many consumers will see their overall debt burden decrease, which may help stabilize finances. If unsuccessful, those consumers will see no reduction in their debt and will be responsible for resuming paused payments, which may further stress their financial situation. We’ll find out sometime in Q1 or Q2 of 2023, but the result will likely have a big consumer impact either way.
Consumers Are Worried About Inflation and Credit Cards
How are consumers feeling about the economic landscape and their personal finances? TransUnion’s Consumer Pulse Study reports that 54% of consumers said their incomes weren’t keeping up with inflation, while 83% said that inflation was one of their top three financial concerns for the next six months. But despite concerns about rising prices, more than half (52%) of Americans said they felt optimistic about their household finances for the upcoming year, even though 82% of consumers believe the U.S. is currently in or will be in a recession before the end of 2023.
All those new credit cards are causing some concern for consumers, as well. An early December survey from U.S. News & World Report shows that more than 8 in 10 Americans who have credit card debt are experiencing anywhere from a little to a lot of anxiety about it. An overwhelming majority of respondents (81.6%), all of whom have credit card debt, express some degree of stress about it – from a little bit (33.1%) to a medium amount (27%) to a lot (21.5%). The combination of rising costs and insufficient income was the most common reason given for having credit card debt, with unexpected expenses a close second.
What Does This Mean for Debt Collection?
As consumers wake up in 2023 with a holiday shopping hangover and bills to pay, the economic landscape isn’t going to cut them any breaks. Consumers will have to prioritize what they can pay and when, which means repaying some debts may get moved to the back burner while food, housing and other basic needs are addressed. Will delinquencies rise as expected? Will consumers turn to more credit cards or BNPL for a stopgap? What happens to overall debt burden with all the unknowns? We’ll soon find out, but as a lender or collector, here are some things to consider:
Make it easier to engage. On their preferred channel, at a convenient time, with all the information they need is the best way to engage consumers. Bonus points if they can self-serve on their own time.
Make it easier to pay. Paying in full may be impossible for many people with tight budgets, and offering flexible payment plans or removing minimum payment requirements may make debt easier to tackle. Self-serve online payment portals are a win/win for your business and your customers.
Make it more empathetic. Balancing finances and being in debt is hard, and people are doing their best to keep up. Understand that you may not recover past due balances immediately and it may take time and patience. In addition to when and where, reconsider how you’re speaking to consumers and you may be surprised at how empathy drives engagement. Need proof? See how customers responded to TrueAccord’s digital approach to debt collection in our 2022 Year in Review.