According to recent reports, the number of consumers falling behind on their credit card and personal loan payments is on the rise, particularly among riskier borrowers. This increase in missed payments is causing lenders to tighten their lending requirements, although they have yet to reduce credit limits. With credit card balances staying near record highs and unsecured personal loan balances hitting a record high, some experts are concerned that these trends could be signs of potential trouble for consumers. This blog post will discuss the current situation, including the rise in delinquencies, lenders' reactions, and what the future may hold.


The Rise in Delinquencies:

The "delinquency transition rate" for credit cards, which measures the share of credit card debt that is 30 days or more past due, increased by 0.6 percentage points during the first three months of the year, according to a Federal Reserve Bank of New York report. This is approaching pre-pandemic levels. Similarly, a first-quarter report from credit bureau TransUnion found that delinquency rates increased year over year on credit cards and unsecured personal loans. The increase in missed payments is likely due to so many loans being originated in the second half of 2021 into 2022 being given to riskier borrowers in below prime risk tiers.

Lenders' Reactions:

The rise in delinquencies is prompting lenders to tighten their lending requirements. A significant number of banks reported tighter lending requirements for credit card, auto, and other consumer loans in the first quarter, according to a Federal Reserve survey of senior loan officers. This is a typical reaction to changing environments as lenders adjust their underwriting criteria to meet their delinquency expectations. However, lenders are not yet reducing credit lines and loan amounts. The average limit on new credit cards has actually increased, and the average personal loan balance hit its highest level on record. This is a somewhat positive sign, as lenders typically reduce credit lines when they sense an economic downturn.

What the Future May Hold:

Experts believe that as long as unemployment remains low, there is not too much trouble yet on the horizon. The good news is that consumers are not over-leveraged, nor is there significant strain in the market. However, if unemployment rates tick up, more consumers will start to feel financial stress, and the situation could change quickly.

Conclusion:

In conclusion, the increasing delinquency rates among risky borrowers are prompting lenders to tighten their lending requirements. While lenders have not yet reduced credit lines and loan amounts, they have become more cautious about who they lend to. As long as unemployment remains low, experts believe that there is not too much trouble yet on the horizon. However, if unemployment rates increase, more consumers could start to feel financial stress, and lenders may have to take more drastic measures to protect themselves.