“Wage growth and job growth is mostly nonexistent. Also hitting consumers’ wallets, although inflation has moderated, is the high cost of living,” Miller told Business at the release of TransUnion’s latest Consumer Credit Index.
The index indicates credit health deteriorated at a slightly slower pace in the third quarter, rising to 49.3 from 48.9 in the second quarter. Any number below the break-even 50 mark reflects a decline in credit health.
“Despite this we are now heading for three straight years of declining credit health,” Miller said.
Measuring consumers’ ability to service existing credit obligations within the constraints of their monthly household budget, the index indicated household cash flows had fallen to their lowest point since early 2010.
Although the distressed borrowing indicator stabilised in Q3, it still shows households are being forced to access more credit to supplement their budget.
TransUnion said credit cards were driving the growth of revolving credit, which was rising at a rate of 3.5% year-on-year. This remains well below 2008 levels, when distressed borrowing was rising at a rate of approximately 10% year-on-year.
“Consumers are using credit cards and other revolving facilities more often and don’t have the ability to pay down those balances and those balances are continuing to rise,” Miller added.
New consumer loan defaults have declined, indicative of more prudent lending measures in place since 2013. “The falling rate of new defaults may in some cases be a result of the increased use of revolving credit and distressed borrowing,” said Miller.
The 25-basis-point increase in the repo rate in July, to 5.75%, resulted in an increase in the prime rate of interest from 9% to 9.25%. “Debt servicing costs have increased by around 6.5% in the past year across the board for loans linked to prime,” TransUnion said.
Miller said there was still a lot of bad debt that needed to work its way out the system, but banks had provided for that and it would level out. “Our sense is we are going to continue to see a period of stress and high delinquency but we don’t think it’s going to be a catastrophe.”