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U.S. borrowers who took on new debt amid the pandemic are defaulting on repayments at unusually high interest rates after lenders extended more credit to households using government stimulus measures.
Federal programs sent cash and froze certain loan repayment requirements for U.S. consumers suffering from the Covid-19 economic shock.
According to a report from TransUnion, a credit reporting agency, the average consumer credit score increased 20 percent to a high of 676 in the first quarter of 2021. Credit scores above 670 are considered “good.”
Lenders were increasingly willing to provide consumer credit. Credit card and unsecured loan originations increased by more than half between 2020 and 2022, according to TransUnion.
Data shows that borrowers who took out loans in 2021, 2022 and early 2023 are finding it unusually difficult to keep current on these debts.
“Consumer finance companies seized this opportunity to boost their growth at a time when financing was plentiful and consumers’ finances had received an artificial boost,” said Mark Zandi, chief economist at Moody’s Analytics. “Certainly many lower-income households affected by all of this will experience financial hardship.”
For credit card accounts opened in the first quarter of this year, the delinquency rate reached 4 percent in September, while in September 2022 the nine-month delinquency rate for new accounts was 4.5 percent. Values at the same point in the year were the highest since 2008, according to data from Moody’s Analytics.
“Consumer performance with older credit cards is returning to pre-coronavirus levels, but new credit card delinquencies are exceeding 2018 and 2019 levels,” said Rikard Bandebo, chief product officer at credit scoring company VantageScore. A study by his company found that credit cards issued in March 2022 had higher default rates than cards issued at the same time in the previous four years.
Riskier auto loans made during the height of the pandemic have more repayment problems than in previous years, according to data from S&P Global Ratings. Last year, borrowers with subprime loans defaulted twice as quickly as before the pandemic.
“We know lenders have been pretty aggressive during this time,” said Amy Martin, who tracks auto loans for S&P. “The 2022 vintage is definitely worse than previous years.”
U.S. banks that reported earnings last week said they increased provisions for loan losses as defaults mounted. Bank executives told analysts they viewed the trend as “normalization” and returned default rates to pre-pandemic levels.
Bill Moreland, who runs the research group BankRegData and has warned of rising defaults, recently estimated that there were hundreds of billions of dollars in “excessive lending due to artificially inflated credit scores” by the end of last year.
Higher crime rates are raising fears that government aid to ease the financial burden of lockdowns may have caused financial hardship for some consumers.
The Cares Act — the $2.2 trillion federal relief package passed in the early days of the pandemic — was among the programs that put money in consumers’ pockets. In addition to direct aid, measures protected borrowers from foreclosures and other defaults. In many cases, lenders were prohibited from reporting late payments to credit reporting agencies.
“I think the Cares Act was good policy,” said Pam Foohey, a law professor at Yeshiva University who studies consumer bankruptcies. “I blame the lenders and the market structure for not having a longer-term perspective. This is not something the Cares Act should have solved, and it still exists and needs to be addressed.”
Source : www.ft.com