Amidst Stubbornly High Inflation, Consumers Turn To Credit Cards, Home Equity To Maintain Stability

Amidst an economic environment of rising interest rates and high inflation, the fourth quarter of 2022 saw consumers continuing to look to credit as a means to help stave off these financial pressures. TransUnion’s (NYSE: TRU) newly released Q4 2022 Quarterly Credit Industry Insights Report (CIIR) shows that whether it’s Gen Z consumers opening credit cards, homeowners taking out home equity lines of credit (HELOCs) or consumers continuing to turn to unsecured personal loans, more and more borrowers are looking to a range of credit products to cope with the financial pressures of today and better position themselves for the evolving financial landscape.

“Whether it’s shopping for a new car or buying eggs in the grocery store, consumers continue to be impacted in ways big and small by both high inflation and the interest rate hikes implemented by the Federal Reserve, which we anticipate may continue for at least a few more months,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion. “If more moderated rate hikes continue, it would be a good sign that the increases have been working, and that some relief from high inflation may be on the horizon. Until then, we fully expect consumers to continue to look to credit products such as credit cards, HELOCs and unsecured personal loans to help make ends meet and put themselves in stronger financial standing moving forward.”

An example of increased credit usage: credit card balances continued to grow, reaching record levels at the end of 2022. Bankcard originations were also up year-over-year (YoY) in Q3 2022 (the most recent originations data available), from 20.1 million in Q3 2021 to 21.6 million. Gen Z consumers, in particular, increasingly continued to turn to bankcards, showing YoY growth in both balances (up 64% YoY in Q4 2022) and originations (up 188% YoY in Q3 2022). Somewhat concerning is an upward trend in credit card delinquencies in both bankcard and private-label; however, context is required.  Delinquencies for bankcards in Q4 2022 are still hovering around pre-pandemic levels observed in 2019 while private label card delinquencies remain below pre-pandemic levels.  

While higher interest rates dampened new and refinance mortgage originations in Q3 2022, homeowners continued eagerly tapping into their record stores of home equity to help in consolidating their high interest debt. In fact, the most recent origination figures from Q3 2022 show that HELOCs and home equity loans (HELOANs) continued to be a popular option in Q3 2022. Consumers are also still seeking out unsecured personal loans as a way to pay off high interest debt and, despite growing delinquency rates among borrowers, lenders remain eager to lend, albeit seemingly with adjustments in their lending criteria that includes a gradual shift away from below prime borrowers.

“HELOCs and Home Equity Loans continue to grow at unprecedented levels as homeowners increasingly take advantage of the record levels of tappable home equity they have built in their homes,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “The main reasons why homeowners utilize the equity available to them is to consolidate debt, home improvement and big ticket purchases. Lenders who will benefit from this trend are those who have the ability to identify and reach homeowners who have equity available to tap and who also, either carry high interest rate debt that can be consolidated or own older homes that may warrant improvements. Leveraging data and analytics from companies like TransUnion that have all this data could result in realized benefits for homeowners (through reduced monthly costs) as well as lenders (through cross-sell conversion and portfolio growth).”

Mortgage originations continued their slowdown in the face of higher interest rates, with the most recent quarter of data, Q3 2022, showing a 56% decrease YoY in overall originations, down to 1.5M from 3.4M in Q3 2021. For the sixth consecutive quarter, new purchases made up the bulk of total origination volume in Q3 2022, up 28 percentage points from 55% in Q3 2021 to 83%, outnumbering refinance five to one for the quarter with volumes on par with pre-pandemic levels (1.2M). Overall refinance originations fell by 84% YoY to 250,000; the lowest on record – driven primarily by the dramatic decrease of rate-and-term refinances, down by 95% YoY to 40,000. Total mortgage balances reached a record level in Q4 2022 of $11.7 trillion, 9% higher than the same period last year. The annual growth rate of tappable homeowner equity continues to increase, up by 18% YoY in Q3 2022, reaching an all-time high of $20.2 trillion. This represents an increase of $600 billion from Q2 2022. HELOCs were up 41% YoY in Q3 2022, while Home Equity loan originations grew 47% YoY in 2022, representing the most Home Equity loan originations on record since 2010. Delinquencies ticked up, with borrower delinquency (60+ days past due) growing 17% YoY to 0.96% in Q4 2022. While delinquency levels remain low, this marks the third consecutive quarter of increase.