Young, low-income Americans hit hardest by soaring inflation

Persisting high inflation in the US has forced Americans to spend more on gas and bills, making young and low-income consumers feel the financial pressure and piling credit card debt.

Generation Z consumers and those with low credit scores are falling behind on credit card and auto loan payments and accumulating credit card debt at a pace not seen before the pandemic, Reuters reported Monday, citing US credit files compiled by credit score company VantageScore.

“For instance, credit card balances for people ages 25 and younger rose by 30% in the second quarter from a year earlier, compared with an increase of just 11% among the broader population,” the report added, citing a random sampling of 12.5 million collected by the firm.

Balances for non-prime borrowers -- people with credit scores below 660 -- climbed by nearly 25 percent over the same period, it noted.

According to the report, data released on Thursday indicated that US consumer spending grew at its slowest pace in two years as the economy unexpectedly contracted in the second quarter. 

“Those surging prices are causing consumers to cut back on discretionary spending,” it added, citing giant retail and consumer companies such as Walmart Inc and Procter & Gamble Co, which lowered sales growth forecasts over the past week.

Rapidly accelerating prices could exacerbate financial strains among young people and borrowers with low credit scores, said VantageScore chief Silvio Tavares, noting that among non-prime borrowers, the percentage of credit card and auto loans that were more than 30 days past due also climbed.

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Credit card delinquency rates are now back to their pre-pandemic levels for young people and non-prime borrowers, the data showed.

For months, the report noted, “things have been looking good for US consumers, their bank accounts padded by government stimulus, student loan forbearance and pandemic-era savings,” with bank executives consistently insisting that consumers have healthy financial cushions and are spending money despite high inflation and the slowing economy. 

However, there are signs that some Americans have overextended their finances from traveling and dining out while paying down less debt on their credit cards, Tavares emphasized, noting that despite a strong record of consumer’s debt repayment history, "there are areas of concern; number one among them is consumers are adding leverage.”

While the delinquency rates are not yet a cause for concern, "it's definitely something to watch," Tavares further underlined. "You can get a bit of a canary in a coal mine effect. If it happens with one group, sometimes it can spread to another group."

Another top US consumer credit rating agency, TransUnion, estimates credit card delinquency rates could soar to 8.4 percent in the first quarter of 2023, up from eight percent in the first quarter of this year, if inflation remains high. 

The average debt held by a non-prime customer was $22,988 in the first quarter of 2022, excluding mortgages, according to TransUnion. That is up from $22,461 a year earlier and $22,970 in the first quarter of 2020, before the pandemic began in the United States.

Auto loans make up a significant chunk of that debt, as demand for vehicles soared in 2021 across the US, pushing up the price and duration of loans for cars. 

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