Credit health plummeting – Index at its lowest since 2020

Consumer credit health is in the intensive care unit, and there is a risk it will deteriorate further, according to the TransUnion SA Consumer Credit Index (CCI).

It fell the most on record in the second quarter (Q2) this year, to 49 from a final reading of 55 in the first quarter.

This reduction brought the index to its lowest level since the third quarter of 2020.

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The index is used to measure credit health, where 50 is the break-even level between improvement and deterioration.

The drop of six points was the sharpest fall in the index on record, surpassing the five-point fall of Q3 in 2020. All four sub-components decreased.

The index showed an increase in credit card use, which suggested consumers were leaning on credit to absorb the higher cost of living.

The average level of three-month defaults rose year on year (y/y), despite falling marginally (0.1%) quarter on quarter.

This was an early warning for a looming slowdown in consumer sectors. Household cashflow was under pressure, with prices increasing more than income, and wage growth unlikely to catch up to living costs for some time.

New credit defaults (accounts three months in arrears) rose by one percent in Q2 compared to the same period in 2021.

With interest rates rising, there appeared to be heightened risk the rate of defaults would increase. This was where distressed borrowing would come into play.

TransUnion determined levels of distressed borrowing by looking at revolving credit (credit and store cards) used as a percentage of a consumer’s credit limit.

Distressed borrowing rose by four percent, compared to the same period last year from 3.9% y/y in Q1, accelerating from one percent y/y in Q4.

Households seemed to be using credit to offset higher living costs. Growth in real cash flow compressed from 8.3% y/y over Q3 last year to a contraction of -0.3% y/y in Q2 of 2022.

With a prime interest rate expected to reach 10.25% by 2024, the average household will have a significantly higher interest burden unless they actively consolidated accounts, paid down debt and managed their expenses.

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