American borrowers leaning on cards as wait for rate cuts continues

Americans across the credit rating spectrum are driving up credit card balances and utilization as they feel the pinch from the higher cost of living.

As the wait goes on for the Federal Reserve to ease off the gas and cut interest rates, especially for those paying higher monthly mortgage payments, using available credit on existing credit cards is offering some relief.

TransUnion’s latest Quarterly Credit Insights Report for the second quarter of 2024 shows that bank card balances grew 4.8% year-over-year led by subprime at 12.3% growth, although all risk tiers saw growth.

Meanwhile card originations were down 7% year-over-year in the first quarter of 2024 (the most recent period with available data) although there was growth for the super prime segment.

For other credit products, unsecured personal loan balance growth continued in the second quarter, although at a slower pace of 6%, down from the double-digit growth seen at its peak during the seven consecutive quarters of increases. There were also more originations for these loans, which saw year-over-year growth for the first time in five quarters in Q1 2024 (the most recent quarter for which originations data are available).

Auto loans recorded lower originations (except for super prime borrowers) but balances were up 2.7% year-over-year. Mortgage originations saw year-over-year growth in Q1 2024, the first YoY growth since 2021.

“Consumers across the board continue to engage with a wide range of credit products, with continued balance growth across credit risk tiers. Lower risk super prime, in particular, originated more this quarter in areas such as credit cards and auto,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “Of course, on the origination front, this doesn’t mean prime and below consumers don’t also have access to new credit in these areas. However, they are going to have to wait for lower interest rates and for their monthly payments to come down.”

Two recent surveys revealed how reliant consumers are on debt even as inflation has become less of an issue.

DELINQUENCIES RISE

There were 554 million credit cards in the US in the second quarter of 2024 while total balances remained above one trillion for the third consecutive quarter at $1.05 trillion and average balamce per borrower was $6,329 (up from $5,947 a year earlier).

Although the number of borrower-level delinquencies (90+ days past due) increased by 20bps year-over-year to 2.26%, this increase was significantly less than the 49bps YoY increase between 2022 and 2023.

“A more pronounced divergence appears to be occurring when it comes to how different consumer segments are faring in this economic environment, and in particular, how they are using their credit cards,” said Paul Siegfried, senior vice president and credit card business leader at TransUnion. “Higher-risk prime and below segments seem to be experiencing more significant inflationary pressures and as such, relying on their cards more, evident in increasing balances and higher utilization. Originations will likely continue to decline for mid-tier and worse consumers as issuers look to less risky borrowers. We expect delinquency rates to continue to rise, though the growth rate should decelerate.”