Inflation begins to strain the finances of low-income American youth

A shopper wearing a face mask is pictured at a Dollar Tree store in Pasadena, California, USA, June 11, 2020. REUTERS / Mario Anzuoni

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NEW YORK, Aug 1 (Reuters) – As high inflation forces Americans to spend more on gas and utility bills, young, low-income consumers begin to feel financial pressures.

Generation Z consumers and those with low credit scores are late on credit card bills and auto loans and are piling up credit card debt at a rate not seen since before the pandemic.

For example, credit card balances for people aged 25 and under increased by 30% in the second quarter from the previous year, compared to an increase of just 11% in the broader population, according to a random sampling of 12.5 million US credit files compiled by credit score company VantageScore. Balances for non-prime borrowers, or people with credit scores below 660, increased by nearly 25% over the same period.

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For months, things have been going well for US consumers, their bank accounts filled with government stimulus, student loan granting, and pandemic-era savings. Bank executives have consistently claimed that consumers have healthy financial amortization and are spending money despite high inflation and a slowing economy. Read more

There are now signs that some Americans have overexposed their finances by traveling and dining out while paying less debt on their credit cards, said Silvio Tavares, president and CEO of VantageScore. This contrasts with consumer trends to pay off loans and be more frugal during the first year of the pandemic, according to Fed data.

“The consumer is strong, their balance sheets are solid and their debt repayment history is strong relative to historical averages,” Tavares said. “However, there are areas of concern. Number one among them is that consumers are increasing leverage.”

Federal Reserve Chairman Jerome Powell said time is running out to reduce inflation, which hovers at levels not seen since the 1980s. Read more

Thursday’s data showed consumer spending in the US grew at the slowest pace in two years as the economy contracted unexpectedly in the second quarter. Read more

These rising prices are causing consumers to cut back on discretionary spending, according to retail and consumer companies like Walmart Inc (WMT.N) and Tide-maker Procter & Gamble Co (PG.N), which lowered their forecasts. of sales growth in the past week. Read more

The rapid acceleration in prices could exacerbate financial tensions between young people and borrowers with low credit scores, Tavares said. Among non-prime borrowers, the percentage of credit cards and auto loans overdue by more than 30 days also increased, VantageScore found. The data showed that credit card default rates have now returned to pre-pandemic levels for youth and non-prime borrowers.

While default rates are still not a cause for concern, “it’s definitely something to keep an eye on,” Tavares said.

“You can get some canary in a coal mine effect. If it happens with one group, it can sometimes spread to another group.”

TransUnion, one of the big three consumer credit rating agencies, estimates credit card default rates could rise to 8.4% in the first quarter of 2023, up from 8% in the first quarter of this year. , if inflation remains high. Read more

The average debt held by a non-prime customer was $ 22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. This is up from $ 22,461 a year earlier and $ 22,970 in the first quarter of 2020, before the pandemic began in the United States.

Auto loans make up a significant portion of that debt, as demand for vehicles soared in 2021 in the United States, driving up the price and duration of auto loans. Read more

An executive at a large US-based auto lender who works with many underprivileged consumers said the demand overturned the maxim that a car loses value as soon as it leaves the dealer.

Clients who become insolvent for 90 days pay off their loan in full more frequently, said the executive, who asked not to be named after discussing non-public information. This indicates that borrowers are taking advantage of high car values ​​to sell their car, rather than having it repossessed.

For now, auto loan defaults are still lower than before the pandemic, the executive said.

“We think things will go back to normal – we all expected it – but will they get worse than normal? That’s the question.”


Another idiosyncrasy of the current US economy is that the average credit score rose during the pandemic, due to consumers spending less and paying off debt.

The average VantageScore score was 697 at the end of June, 13 points higher than in January 2020.

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Bank of America, the second largest US bank by assets, recently said its customers’ average credit score was 771.

For younger, lower-income consumers who feel the impact of price shocks caused by inflation more quickly, such credit gains could be weak if they continue to accumulate credit card debt, experts said.

“Any new customer – or customer new to credit – is riskier,” said Moshe Orenbuch, a Credit Suisse analyst who studies bank loan portfolios. “Much of that (debt) growth is replacing the balances paid by people in the first part of COVID.”

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Reporting by Elizabeth Dilts Marshall; Editing by Lisa Shumaker

Our Standards: Thomson Reuters Trust Principles.


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