Understanding the Rise of Consumer Credit, Delinquencies, and Alternative Lending

In 2024, the state of the consumer economy is increasingly dominated by debt accumulation, rising delinquencies, and tightening access to credit. As inflation continues to linger and real wage growth struggles to keep pace, consumers are leaning heavily on revolving credit, such as credit cards, to manage everyday expenses. This has led to significant shifts in the credit landscape, with far-reaching consequences for both borrowers and lenders.?

Surging Debt Levels and Rising Delinquencies?

As of July 2024, consumer credit balances surged by $25 billion, primarily driven by a 9.4% increase in revolving credit, which is largely made up of credit card debt. This marks the highest growth rate seen since earlier this year, and reflects the broader financial pressure many households face. Even non-revolving debt, including auto loans, personal loans, and student loans, reached new highs, with the KPMG report noting that non-revolving credit grew by 4.8% in July alone 1.?

However, the more concerning trend is the rise in credit card delinquencies, which have now hit a 12-year high of 10.9%, according to recent data. These numbers are a clear signal that many consumers are struggling to meet their monthly obligations, a problem exacerbated by high interest rates. For lower-income and younger consumers, who have historically relied on credit as a financial cushion, this growing reliance on debt is pushing many to the brink of default.?

The Cash Flow Crunch: Struggles Across Income Brackets?

Consumers are increasingly feeling the pinch of the cash flow crunch. Inflation may have slowed somewhat, but essential costs like food, housing, and utilities remain elevated. The strain is felt most acutely among those living paycheck to paycheck. PYMNTS reports that 43% of consumers revolve credit card debt, a number that jumps to 65% for those living paycheck to paycheck while dealing with issues paying bills 2.?

This cash flow squeeze is driving more consumers toward Alternative Financial Services (AFS), such as short-term loans and paycheck advances from platforms like OppFi and Affirm. As traditional lenders tighten their underwriting standards due to rising delinquency rates, subprime and even higher-credit consumers are turning to AFS loans to manage day-to-day expenses. The Experian Clarity Services Q2 2024 report highlighted that AFS loan originations are on the rise, driven by both subprime and higher-credit borrowers who are unable to access traditional credit solutions.?

Lenders on Edge: Tightening Credit Standards?

The growing credit card debt and rising delinquencies are pushing lenders to take a more cautious approach. Many are tightening their lending standards, a move aimed at protecting their portfolios from further deterioration. The Federal Reserve’s recent reports indicate that the tightening of credit is having an impact, as consumers with less-than-prime credit scores struggle to secure new loans or extend their existing credit lines 1.?

As PYMNTS highlights, lenders are increasingly concerned about the financial health of their borrowers. While slowing inflation and potential interest rate cuts from the Federal Reserve offer a glimmer of hope for borrowers, the path ahead remains uncertain. Many lenders worry that if these economic relief measures don’t come soon enough, delinquencies could spike further, especially as net charge-offs, which peaked earlier in the year, remain elevated 2.?

The Outlook: Will Rate Cuts Provide Relief??

There is growing anticipation that the Federal Reserve will begin cutting interest rates in the final quarter of 2024, which could provide some much-needed relief to borrowers struggling with high credit card interest rates. However, even with the hope of rate cuts on the horizon, the reality is that many households have already accrued significant debt loads that will take time to unwind.?

The current debt burden is compounded by eroding personal savings, particularly among lower-income households. During the pandemic, many consumers built up savings thanks to government stimulus and reduced spending opportunities. However, those savings have now been largely depleted, leaving many reliant on credit once again. With personal savings rates plummeting, it’s likely that we’ll continue to see high levels of credit usage as households attempt to make ends meet 1 2.?

Conclusion: Navigating a Fragile Consumer Credit Market?

As we move through the second half of 2024, the consumer credit market remains in a delicate balance. While slowing inflation and potential interest rate cuts may offer some relief, the reality is that many consumers are already feeling the strain of high debt loads and rising delinquencies. For lenders, this presents a challenging landscape—one where tightening credit standards may be necessary to mitigate risk, but could also exacerbate the financial struggles of consumers who are already stretched thin.?

The growth of AFS loans provides an alternative for consumers shut out of traditional lending, but it also signals broader financial instability as households struggle to maintain cash flow. As we’ve seen with the performance of companies like McDonald’s and Dollar Tree, consumer spending is shifting toward essential goods, leaving less room for discretionary purchases and heightening the reliance on credit to meet everyday needs.?

Ultimately, the current state of the consumer economy underscores the need for careful navigation by both lenders and borrowers as we head toward a potentially tumultuous close to the year.?

1(KPMG) ? 2( PYMNTS.com ) ?

Feature Provided by:

Daniel Green

everchain.com

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