Low-income young Americans hardest hit by soaring inflation
Persistently high inflation in the United States has forced Americans to spend more on gas and bills, putting financial pressure on young consumers and low-income consumers and piling up credit card debt.
Gen Z consumers and those with low credit scores are falling behind on credit card and car loan payments and racking up credit card debt at rates not seen before the pandemic, Reuters reported on Monday, citing US credit reports compiled by credit rating firm VantageScore.
“For example, credit card balances for people aged 25 and under increased 30% in the second quarter compared to the previous year, compared to an increase of only 11% in the general population”, adds the report, citing a random sample of 12.5 million collected by the firm.
Balances of non-preferred borrowers — people with credit scores below 660 — rose nearly 25% over the same period, he noted.
According to the report, data released Thursday indicated that US consumer spending grew at its slowest pace in two years as the economy unexpectedly contracted in the second quarter.
“This price spike is forcing consumers to cut back on discretionary spending,” he added, citing giant retail and consumer corporations such as Walmart Inc and Procter & Gamble Co, which lowered growth forecasts. sales over the past week.
Rapidly accelerating prices could exacerbate financial stress among younger people and borrowers with low credit scores, VantageScore chief Silvio Tavares said, noting that among unpreferred borrowers, the percentage of credit cards and Auto loans over 30 days in arrears also increased.
Credit card delinquency rates are now back to pre-pandemic levels for young people and non-preferred borrowers, the data shows.
For months, the report notes, “things are looking good for American consumers, their bank accounts padded by government stimulus, student loan forbearance and pandemic-era savings,” executives banks constantly insisting that consumers have sound financial cushions and are spending money despite high inflation and a slowing economy.
However, there are signs that some Americans have overburdened their finances by traveling and dining out while paying off less debt on their credit cards, Tavares pointed out, noting that despite a strong track record of paying down consumer debt , “there are areas of concern; number one of them is that consumers are adding leverage.
While delinquency rates aren’t yet a concern, “it’s definitely something to watch,” Tavares added. “You can get a bit of a canary in a coal mine effect. If it happens with one group, sometimes it can spread to another group.”
Another US consumer credit rating agency, TransUnion, estimates that credit card delinquency rates could climb to 8.4% in the first quarter of 2023, from 8% in the first quarter of this year, if the inflation remains high.
The average debt held by an unpreferred customer was $22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. This represents an increase 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 account for a significant portion of this debt, as demand for vehicles soared in 2021 in the United States, driving up the price and term of loans for cars.