Findings from the newly released Q4 2023 Quarterly Credit Industry Insights Report (CIIR) from TransUnion (NYSE: TRU) reveal that credit card debt is at a historical high, driven in part by Millennials further building on their credit portfolios. This comes at a time when an anticipated reduction in interest rates over the course of the coming year may open up new avenues to more affordable credit.
Bankcard balances reached a new record in Q4 2023, surpassing the $1 Trillion mark for the first time on the back of 13% growth year-over-year (YoY). Balances increased across all risk tiers, led by subprime which grew 32% YoY to $105 billion. Generationally, the Gen X share of bankcard balances continued to be the largest (33.8%) while the Millennial share (29.4%), for the second straight quarter, surpassed that of Baby Boomers (26.7%). Millennials were the overall share leader in originations in Q3 2023, accounting for 29.6% of all new bankcard originations.
“Inflationary pressures and higher-than-expected living costs have led to many consumers turning to bankcards to help make ends meet in recent quarters, and Millennials are no exception.” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “It’s worth watching how this generation uses credit in the coming year, one which will likely see some positive economic developments play out, but also challenges. Among these challenges will be the end of the one-year on-ramp to student loan payment resumption, something that may impact many consumers in this generational group.”
Millennials Share of Bankcard Balances Surpassed That of Baby Boomers for the First Time in 2023
At the same time, originations for both unsecured personal loans as well as home equity lending products were down YoY. This development is interesting as both products potentially offer consumers and homeowners lower-interest options to refinance high-cost credit card debt. Unsecured personal loans in Q3 2023 were down 10% YoY, which is the fourth consecutive quarter of decreasing origination volume, as lenders show more scrutiny in their lending decisions and lenders in the FinTech sector face continued capital constraints. While home equity lending remains stronger than prior to the pandemic, both HELOC and HELOAN originations were down significantly YoY in Q3 2023 – reflecting declines of 29% and 8%, respectively – as more homeowners have been holding off from tapping into available home equity while interest rates remain high.
“If the expected Fed interest rate cuts over the course of 2024 take place, lenders may find opportunity as consumers carrying elevated card balances seek to lower their monthly payments by refinancing high-cost debt into a lower interest product,” said Raneri. “Consumers should know their credit scores and work to improve them where possible. This will ensure they are as well-positioned as they can be to take advantage of those lower rates if the opportunity arises.”
Credit balances continue to rise as TransUnion’s Credit Industry Indicator (CII) fell to 107 in Q4 2023, its lowest since Q1 2021, just before the post-pandemic surge in credit usage. Multiple factors played a role in this drop, including slowing new credit demand and supply as well as rising delinquency rates. The CII is a quarterly measure of depersonalized and aggregated consumer credit health trends that summarizes movements in credit demand, credit supply, consumer credit behaviors and credit performance metrics over time into a single indicator. Examples of data elements categorized into these four pillars include: new product openings, consumer credit scores, outstanding balances, payment behaviors and more than 100 additional variables. Increases in the CII level indicate overall positive trends in the health of the credit market.
In terms of mortgages, origination volumes continued to see YoY declines, down 22% to 1.2 million in Q3 2023. This, however, represented the smallest YoY decline in the past seven quarters, indicating that the mortgage origination market may be near its bottom. Purchase originations were down 18% YoY for the quarter, while rate and term refinance was down 27%. Cash-out refi was down 44% YoY in Q4 2023. Generationally, the share of mortgage originations in Q4 among Gen Z rose from 9.6% in Q3 2022 to 13.2% in Q3 2023 as more Gen Z consumers age into traditional homebuying years, while all other groups fell in share over the same period. In the home equity market, the post-pandemic surge in originations has slowed but remained above recent historic norms in Q3 2023 at 582K. This represents the second-highest Q3 since 2008. The total was split fairly evenly between HELOCs and HELOANs for the quarter, and both were driven by originations from Gen X and Baby Boomer homeowners. 60+ DPD consumer-level delinquencies continued to inch higher to 1.03% in Q4 2023.
“Persistently high mortgage rates remain a significant headwind in the mortgage market, particularly affecting demand for refinance,” said Satyan Merchant, senior vice president, automotive and mortgage business leader at TransUnion. “Purchase originations will continue to drive the mortgage market over the next several quarters, as demand for refinance will depend on mortgage rates falling significantly below current high levels. The 2022 resurgence in home equity lending continued to recede in Q3 2023, with both HELOCs and HELOANs coming off the 10-year highs seen the year prior.”
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