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Show Me the Money

Credit resources you should consider to improve your financial well-being

By Bill Carter

Consumers would like nothing better than to return to something “normal” but even as increases in credit usage appears likely, the specter of inflation is among the factors adding uncertainty to the picture.

Consumer credit across the board is expected to rise in 2022. According to projections from TransUnion, it’s still behind pre-pandemic levels but in other cases, they’re exceeding it. Some of the growth will result from credit-hungry lenders offering more credit to non-prime borrowers, notably in auto lending, credit cards, and unsecured personal loans.

Massive increases in home prices are driving major growth in home equity that consumers could tap into for secured personal borrowing, potentially waking up a credit category that has been very quiet for years.

Overall, TransUnion cites the increasing normalization of the economy as a factor in growth anticipated for 2022. A potential influence will be increased interest rates. The Federal Reserve has indicated there will likely be at least three quarter-point hikes in 2022.

Wild cards include ongoing inflation, as well as the impact the Omicron COVID variant (and others) will have on the economy. Meanwhile, the last elements of pandemic debt forbearance measures will be running out.

Outlook for three key consumer credit categories

In 2021, Fed Chairman Jerome Powell told a press conference “There’s a real risk now, I believe, that inflation may be more persistent and the risk of higher inflation becoming entrenched has increased.”

Lenders’ strategy of increasing relationships with non-prime customers could backfire if not managed carefully. Inflation often hits lower-income borrowers harder than higher-income consumers, according to Charlie Wise, Head of Global Research and Consulting at TransUnion.

Four out of five consumers surveyed by Transunion say they are highly concerned about inflation.

Another uncertainty will be the ripple effects of major spending through the buy now, pay later programs during the 2021 holiday season. “Growth in that sector continues to be enormous,” (TransUnion is working with Buy Now Pay Later (BNPL) providers to add the plans to its database. In December 2021 Equifax announced it would add certain “pay in four” plans to its records and Experian is working on expanding its coverage of the payment plans.)

In the following sections, organized by credit type, the figures reported are the latest available from TransUnion.

Credit Cards: Record New Account Originations May Drive Success —
or Difficulty

Credit card balances are projected to continue to increase in 2022, on top of a rise in 2021. This represents a continuing comeback from 2020 when many consumers paid down their credit card balances with savings resulting from working from home and with government stimulus payments.

Outstanding credit card balances stood at $726.2 billion at the end of the third quarter of 2021, up slightly over the year earlier, but still nearly 10% lower than the level in the third quarter of 2019, pre-pandemic.

Priming the Credit Card Pump:

Originations of new credit card accounts hit a record 19.3 million in the second quarter of 2021, reflecting card issuers’ desires to begin growing balances after tightening credit standards early in the pandemic. The share of accounts extended to non-prime borrowers is forecast to reach 41% in 2022, about even with 2021’s 42% and above the 38% level seen before the pandemic.

TransUnion says that lenders are attempting to build market share and become “top of wallet” for more consumers. There is an upper limit to this strategy, apparently. The company says the surge in account originations will level off in 2022.

The company projects that in the first quarter of 2022 credit card balances will increase by as much as 10% year-over-year and will then stabilize. By the end of 2022, the firm project’s balances will reach $805.7 billion. This would be a 3% year-over-year increase and would be the highest level since the pandemic started. However, card balances would still not come back to pre-pandemic levels.

Consumer liquidity remains relatively high, according to TransUnion, which may be reducing potential growth in card balances. However, another factor in this may be the increasing use of buy now, pay later financing.

What Card Lenders Must Watch

Many buy now, pay later programs don’t charge interest. Even a small increase in credit card rates may boost the perception that BNPL is a bargain.

Wise points out that inflation will pose the biggest challenges to credit cards, and unsecured personal loans, which are often used for debt consolidation. Inflation eats into income levels, affecting consumer mindset and their ability to repay past charges.

Credit card delinquencies are projected to rise during 2022, though still at levels below pre-pandemic marks. Part of the increase will result from a return to larger card purchases, such as for travel and entertainment, the timing dependent on COVID trends.

Despite the affinity that Millennials and Gen Z have for BNPL financing, their use of credit cards continues to grow. As of the second quarter of 2021, Millennials are the largest generation among cardholders now, at 32.7%, and when combined with Gen Z has become almost half of the market, according to TransUnion. Gen Z’s 14% share was a major spike over levels earlier in 2021.

Rising Home Equity Could Bring the Return of a Once-Major Credit Source

The median sales price of existing single-family homes increased by 16% — $50,300 — in the third quarter of 2021 in the 183 markets measured by the National Association of Realtors. Price levels rose in virtually all markets and the increases were in double digits, four out of five areas.

The National Association of Realtors expects price increases to decelerate as more new homes come to market in 2022. But in the meantime, those price increases have boosted home equity values, and potentially demand home equity loans and lines of credit.

Home as an ATM?

TransUnion estimates that the median home equity available per consumer reached $123,747 in the third quarter of 2021. Significantly, this is many times the average non-mortgage debt of $10,151 per consumer.

While the rate of home price increases will likely slow in 2022, TransUnion expects the level of home equity that homeowners will be able to tap in to launch new projects, finance other spending or pay down other debt to increase to as much as $129,528 by the end of 2022. Total home equity available for borrowing is projected to hit nearly $21 trillion by the end of 2022.

Complicating the picture is mortgage refinances aren’t quite done. TransUnion estimates that 20 million consumers could still benefit from a rate and term refinance despite the surge of refinances in 2021. Even if rates went up by a full point, the company says about 10.5 million people could still benefit from this type of refi. In the second quarter of 2021 rate and term refinances represented 27.2% of mortgages. Over the last few years, cash-out refinancing, an alternate reason for refinances, has been a substitute for home equity loans and home equity lines of credit, representing 19.5% of total mortgages in the same time period.  (53.2% of mortgages were for purchases.)

Notably, while in other areas of credit covered by the TransUnion report lenders are reaching into riskier categories, it’s been the opposite in mortgages. TransUnion research found that the distribution of mortgage balances has been trending towards less risky consumers. Mortgage delinquencies have been low, but the company points out that they could rise a bit as mortgage forbearance programs wind down in 2022.

Auto Loans: Strong Credit Demand Hampered by Supply Issues

Inventory challenges, chiefly due to shortages of the chips that are so vital to today’s vehicles, will continue to plague auto lenders through 2022, TransUnion projects. As a result, growth in originations will most likely remain relatively flat.

TransUnion predicts there will be 28.9 million auto loans originated in 2022, up only 2% from the expected level of 2021 sales. Testimony to the trend is that the use of dealer and manufacturer incentives has fallen to a trickle.

Rising auto prices will increase origination levels in dollars. New vehicle prices set new records through November, according to Kelley Blue Book, with average transaction prices up 13% over the year before. A seller’s market, in which high prices and limited choice stymie purchases, will continue for some time, according to Kelley. New SUVs showed the smallest increase, 4.8% year over year — but average transaction prices for these autos were north of $73,000.

Used auto prices have also been reaching record levels, according to data from J.D. Power and Manheim.

Average auto loan balances were up 6.6% as of the third quarter of 2021 over the year before, according to TransUnion.

“As we see inventory increase, this will likely influence origination growth,” says Satyan Merchant, SVP and Auto Business Leader at TransUnion. “However, consumer demand for vehicles has not waned, and as we see inventory increase, this will likely influence origination growth.”

Merchant says that lenders want to increase lending and as a result will expand into non-prime credit, especially sub-prime borrowers, to meet consumer demand.

What to Watch:

Even given the flat trend, a significant change TransUnion sees is the slowly growing portion of the auto loan market attributable to Millennial and Gen Z borrowers. The two groups represent almost half of the auto loan market now — 33.5% for Millennials and 12.3% for Gen Z. Delinquencies among auto borrowers are expected to rise slightly in 2022, as lenders reach further down the credit scale. However, low delinquency rates suggest to TransUnion that the increase should be small and that delinquencies will generally be stable.

Rising Home Equity Could Bring the Return of a Once-Major Credit Source

The median sales price of existing single-family homes increased by 16% — $50,300 — in the third quarter of 2021 in the 183 markets measured by the National Association of Realtors. Price levels rose in virtually all markets and the increases were in double digits (or nearly so) in four out of five areas.

The National Association of Realtors expects price increases to decelerate as more new homes come to market in 2022. But in the meantime, those price increases have boosted home equity values, and potentially demand for home equity loans and lines of credit.

$21 million. Now that’s a LOT of equity sitting untapped that could be used to consolidate debt, make a major purchase, college expenses and obtain a lower rate than those on unsecured loans.

So, I’ve shown you where the money is. Now it’s up to you, with your detailed knowledge of your budget, to seek out some of these products and services and move forward. And if you haven’t looked at mortgage rates over the past three years, you should do so. Refinancing your first mortgage if rates are now lower could save you thousands in interest and lower your monthly housing expense. And rates will be going up soon.

Get busy.

Bill Carter is Director of Fire/EMS Business Development for Civic Federal Credit Union in Raleigh. He has been in the financial services industry for 42 years and serves on the Advisory Board of the North Carolina Fallen Firefighters Foundation. You can send your questions to him at: bill.carter@civicfcu.org.

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