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US borrowers who took on new debt in the middle of the pandemic are falling behind on repayments at unusually high rates, after lenders extended more credit to households helped by government stimulus.
Federal programmes sent cash and froze certain loan repayment requirements for US consumers strapped by the economic shock of Covid-19.
One effect was to drive up the median consumer credit score by 20 per cent to a peak of 676 in the first quarter of 2021, according to a report by TransUnion, a credit reporting agency. Credit scores above 670 are considered “good”.
Lenders became more willing to provide consumer credit. Credit card and unsecured loan originations rose by more than half between 2020 and 2022, TransUnion said.
Data shows that borrowers who took out loans in 2021, 2022 and early 2023 are having an abnormally hard time keeping current on those debts.
“Consumer finance companies used this opportunity to juice up their growth at a time when funding was ample and consumers’ finances had gotten an artificial boost,” said Mark Zandi, chief economist of Moody’s Analytics. “Certainly a lot of lower-income households that got caught up in all of this will feel financial pain.”
For credit card accounts opened in the first quarter of this year, the delinquency rate hit 4 per cent in September, while in September 2022 the nine-month delinquency rate for new accounts was 4.5 per cent. The levels were the highest for the same point of the year since 2008, according to data from Moody’s Analytics.
“Performance of consumers with older credit cards are returning to pre-Covid levels, but for new credit cards the delinquencies are exceeding 2018 and 2019 levels,” said Rikard Bandebo, chief product officer of credit scoring company VantageScore. A study by his company found that credit cards issued in March 2022 have had higher delinquency rates than cards issued at the same time during the prior four years.
Riskier car loans made during the height of the pandemic have more repayment problems than in previous years, according to data from S&P’s Global Ratings. Last year, borrowers with subprime credit were becoming delinquent on new car loans at twice the rate as they were before the pandemic.
“We know that lenders were rather aggressive during that period,” said Amy Martin, who tracks auto loans for S&P. “The 2022 vintage is definitely worse than prior years.”
US banks reporting earnings in the past week said they had increased provisions for loan losses as delinquencies rose. Bank executives told analysts they saw the trend as a “normalisation”, returning delinquency rates to where they were before the pandemic.
Bill Moreland, who runs research group BankRegData and has warned about rising delinquencies, recently estimated that by late last year there had been hundreds of billions of dollars in “excess lending based upon artificially inflated credit scores”.
Higher delinquency rates are raising fears that government assistance put in place to alleviate financial stress from the lockdowns may have led some consumers into financial difficulty.
The Cares Act — the $2.2tn federal aid package passed in the early days of the pandemic — was among the programmes that put cash in consumers’ pockets. Besides direct aid, measures protected borrowers from foreclosures and other defaults. In many instances lenders were barred from reporting late payments to credit bureaus.
“I do think the Cares Act was good policy,” said Pam Foohey, a law professor at Yeshiva University who studies consumer bankruptcies. “I fault lenders and the market structure for not having a longer-term perspective. That’s not something that the Cares Act should have solved and it still exists and still needs to be addressed.”
