After two years of aggressive loan growth, particularly for credit cards and personal loans, and serious delinquency rates that generally remained near pre-pandemic levels, the consumer credit market will experience more pronounced changes in 2023. TransUnion’s (NYSE: TRU) 2023 Consumer Credit Forecast projects delinquency rates for credit card and personal loans to rise to levels not seen since 2010. At the same time, demand for most lending products will remain high relative to pre-pandemic levels with the number of consumers securing auto and home equity loans increasing on an annual basis.Despite a challenging macroeconomic environment, TransUnion’s new Consumer Pulse study found that more than half (52%) of Americans are optimistic about their financial future during the next 12 months. The youngest generations – Millennials (64%) and Gen Z (61%) – are most optimistic. The optimism levels are occurring against a backdrop wherein 82% of consumers believe the U.S. is currently in or will be in a recession before the end of 2023.
“Rapidly increasing interest rates and stubbornly high inflation combined with recession fears represent the latest in a series of significant challenges consumers have faced in recent years. It’s not surprising then to see pronounced increases in delinquency rates for credit card and personal loans, two of the more popular credit products,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “Yet, many consumers – from a credit perspective – are in a better position than they were just a few years ago, equipped with credit they can use in case of more macroeconomic challenges. We expect demand for credit to continue to be high with lenders positioned well to meet it. While unemployment is likely to rise next year, it should remain relatively low, a key element for a healthy consumer credit market.”
The forecast found that there is room for optimism with auto loan and home equity originations expected to rise next year. While credit card originations are expected to drop from 87.5 million in 2022 to 80.9 million in 2023, the number of new cards opened will remain much higher than at any time in the last decade. About one in four Americans (26%) surveyed in the Consumer Pulse study reported plans to seek new credit or refinance in the next year. Of those, 53% plan to apply for a credit card, more than double all other credit types; car loan/lease (23%), personal loan (22%), mortgage (17%), new HELOC (14%) and refinance mortgage (14%).
From a delinquency perspective, TransUnion forecasts serious credit card delinquencies to rise to 2.60% at the end of 2023 from 2.10% at the conclusion of 2022. Unsecured personal loan delinquency rates are expected to increase from 4.10% to 4.30% in the same timeframe. Serious auto loan delinquency rates are expected to modestly decline to 1.90% in 2023 from 1.95% in 2022.
TransUnion’s forecasts are based on various economic assumptions, such as expected consumer spending, disposable personal income, home prices, inflation, interest rates, real GDP growth rates and unemployment rates, among other metrics. The forecasts could change if there are unanticipated shocks to the economy, such as if COVID-19 disrupts recovery efforts, home prices unexpectedly fall or inflation continues to remain elevated through the next year. Better-than-expected improvements in the economy, such as potential increases in GDP and disposable income, could also impact these forecasts.
Trend 1: Card Originations to Remain Above Pre-Pandemic Levels in 2023, Though Delinquency Rates to Rise
The credit card industry has seen strong growth in originations since Q2 2021. Future period originations are expected to be impacted by tighter lender underwriting standards in anticipation of a potential economic downturn. As a result, card originations are expected to moderate over the course of 2023, with originations forecast to be down 7.6% compared to the record setting 2022. In 2023, TransUnion expects 80.9 million new credit cards, down from an expected 87.5 million in 2022. The origination volume, though, remains much higher than what has been observed in recent years: 76.8 million in 2021, 50.5 million in 2020, and 66.8 million in 2019. Card balances are expected to continue their growth trend in 2023, albeit more slowly, rising to $934.5 billion by the end of 2023, an increase of 1.8% YoY. This comes as consumers continue to utilize cards while negotiating through high inflation and a rising interest rate environment. Card delinquency, on the rise in 2022, is expected to increase to 2.6% through the end of 2023, which would represent a 20.3% increase YoY.
“In the midst of an unsettled economic environment, lenders are likely to scrutinize origination strategies and their expected results, thus resulting in a slowdown in originations over the course of 2023. However, it’s important to put the current credit card marketplace in perspective. When taking 2022 out of the equation, more consumers will gain access to credit cards in 2023 than in any other year in the last decade. In fact, TransUnion expects 14 million more credit cards to be issued in 2023 than in 2019, a strong year for the consumer credit market. Such access provides consumers with more cushion in case of any macroeconomic challenges. Credit card balances are forecast to rise over the course of the year as many consumers continue to turn to cards to help them manage cash flows. We expect card delinquency to increase in 2023 as consumers face liquidity shortages from the prolonged high inflation environment, slowing wage growth, and expected increases in unemployment.”
Paul Siegfried, senior vice president and credit card business leader at TransUnionTrend
2: Following Record Growth, Personal Loan Originations to Slow to “Normal” Levels
Following record growth in originations in the first half of 2022, several factors are driving a pullback that will likely continue into 2023. Persistent high inflation, rising unemployment, and increasing interest rates will likely drive both lender supply and consumer demand lower. Unsecured personal loan originations are forecast at 19.3 million for 2023, down approximately 13% YoY. Following higher than normal volumes in 2022, the number of new personal loans in 2023 should more closely resemble figures observed in 2019 and 2021. After steadily rising in 2022, serious delinquency rates are expected to continue to increase through the remainder of 2022 and into 2023 as increasing unemployment and moderate to high inflation will impact consumers’ ability to meet their credit obligations. Consumers 60+ days past due on their accounts are forecast to increase to 4.30% in 2023, up from 4.10% for 2022.
“After a year of significant growth, unsecured personal growth originations are likely to stay below 2022 levels as lenders reevaluate their risk appetite in this climate of economic volatility. Lenders are likely to turn to additional insights such as trended data in determining which loans to approve. As delinquencies rise, lenders will continue to tighten their buy-boxes, driving lower unsecured personal loan originations in 2023. Net-net, we still anticipate consumers to have a healthy appetite for personal loans.”
– Liz Pagel, senior vice president and consumer lending business leader at TransUnion
Trend 3: Home Equity Originations Should Grow in 2023
High interest rates should continue to dampen mortgage purchase originations, projected to be just over four million in 2023. Such originations are projected to be almost half of recent year totals (7.4 million in 2020, 8.0 million in 2021). Refinance originations for 2023 are forecast at a historical low of just over one million for the year. Tappable home equity is expected to decrease by 6.5% YoY between Q4 2022 to Q4 2023 by $1.3 trillion from $19.4 trillion to $18.1 trillion. This decrease is expected to be a result of a decline in home prices in conjunction with falling balances due to pay down rates. At the same time, despite the anticipated decrease, the amount of available equity that homeowners have in their homes will remain sizable. Home equity originations are therefore expected to increase by 24% in 2023. Delinquencies as measured by 60+ days past due account level are expected to increase to 1.4% by the end of 2023––still well below pre-pandemic levels. However, if there is a deeper correction in home prices and if unemployment rises, mortgage delinquencies could increase.
“As tappable home equity grew to record highs of nearly twenty trillion dollars in 2022, a dramatic increase in homeowners have taken advantage of this and this trend is expected to continue into 2023. HELOCs and HELOANs are a great way to access available home equity without refinancing at a higher interest rate. Currently homeowners have over $600 billion in non-mortgage debt and this is anticipated to increase in 2023 as inflation takes its toll on consumer wallets. Homeowners can considerably reduce their monthly expenses by tapping their home equity to pay off existing debt.”
Joe Mellman, senior vice president and mortgage business leader at TransUnion
Trend 4: Auto Delinquencies Expected to Rise in Q4 2022, Stabilize Through 2023
After a projected decrease of 5.9% through the end of 2022, auto originations are expected to rebound in 2023, with an increase of 4.6% YoY. Most of this growth is expected to occur in the second half of the year with growth of at least 6% expected across all risk tiers in Q4 2023. Auto delinquency is expected to peak in Q4 2022 before leveling off in 2023. The percentage of borrowers 60+ days past due is expected to climb to 1.95% in Q4 2022, and is expected to drop further until finishing 2023 at 1.90%.
“Consumer demand for vehicles is likely to remain strong, and an expected improvement in inventory shortfalls should drive an increase in auto originations over the course of the year. Auto delinquency, spurred by affordability challenges and the possibility of weaker employment, is expected to increase through the end of 2022 before finishing 2023 five basis points lower than the previous year.”
Satyan Merchant, senior vice president and auto business leader at TransUnion
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