July Market Pulse Q&A: Answering Your Questions on Student Loans, Credit Cards, Economic Shifts, and More

Highlights: 

• Student loan payments remain a low priority for consumers, particularly lower-income individuals, potentially impacting their access to other forms of credit and leading to cautious approaches from both lenders and consumers.

• The "K-shaped economy" is evident in credit data, with a concentration of delinquencies among lower-income populations, especially in sectors like auto.

• Improvements in credit card delinquencies are attributed to tax refund seasonality, with larger banks tightening lending while fintechs are seeing increased originations and improving delinquencies.

Both before and during each Market Pulse webinar, our audience submits their burning questions to our expert panelists, some of which we run out of time to cover in the live webinar and which we then answer in this blog. For our July Market Pulse webinar, our panel included Dr. Robert Wescott, President of Wescott Strategic Advisors, Emmaline Aliff, Advisory Leader at Equifax, along with Maria Urtubey and Dave Sojka, Senior Advisors at Equifax. Below are their answers on questions around student loans, credit card delinquencies, and more. 

Q: What do we believe will be any hard data impact of derogatory student loans? And in particular, where does it fit within the payment hierarchy? 

Maria Urtubey, Equifax: Student loan payments have historically been relegated to the bottom of the payment hierarchy, and I don't expect that to change even with the associated late fees, impact to scores, and wage garnishments resuming. There are over 41 million individuals in the U.S. with student loans, and although the spread varies across score tiers, ages, and incomes, those at the bottom of the K-shaped economy, the lower scoring tiers or lower income individuals, have a harder time juggling the additional payment commitments. And not meeting their student loan obligation affects their possibility of accessing other types of credits when needed. If they are already paying over $750 each month for a car that was necessary to get to work, the additional student loan monthly installment will be hard to meet and likely not be the priority. We continue to monitor the delinquency trend and how garnishment hard data materializes over the next few months.

Q: What have you heard about how lenders are reacting to the current market? Has there been some tightening or expanding in terms of lending? 

Urtubey: We have seen lenders tightening their strategies for a couple of years now, as a result of delinquency trends. However, it is business as usual now, as confirmed by today’s poll. And currently, we're also observing consumers pulling back. We're hearing the term “collective cautious approach.” So it's a little of both. The origination subprime share is shrinking, except for auto and bankcards, or keeping to very low levels. It's 3% for bankcard, which is one of the products that consumers rely on the most to make ends meet, and consumers are also preparing to buy less for more. So it's both lender tightening and consumer pullback.

Dave Sojka, Equifax: Also, we've seen reports. And, as we've engaged with lenders in terms of utilization of existing lines or seeking new credit, depending on the market that you're serving, you might experience your customer base being more judicious in what they're spending right. Is it a necessity versus a nice to have? Do I go out to dinner or cook at home? And even that's becoming a tricky question, as the cost of some grocery items, like steaks, are up around 8%. Eggs have come down, but many of the raw ingredients you would cook with have gone up. I think it’s still too early to tell, but as Maria mentioned, it’s a little bit of both. I think it's up to you to look at if you're approving someone and they're declining you, but not going elsewhere, that might be a sign that the customer had second thoughts about what you were offering as opposed to you declining them, which means you’ve tightened your criteria.

Q: How are we seeing the K-shaped economy take effect in credit data? What is more or less pronounced? 

Emmaline Aliff, Equifax: What the “K” is is a visual representation, showing that if you created a graph of the data that you would see that separation of economic recovery in some way. So the place where I have currently seen that the most pronounced is with delinquencies. We know that delinquencies have been on the rise, and sectors like auto are at an all-time high, even compared to the great Recession. However, the proportion of the population that is experiencing subprime credit in the United States has gotten smaller. So, it's a concentration effect of delinquencies on the bottom end, and there's concentration that's been moving up there as well. So there's multiple places where things are starting to diverge a little bit more with respect to those two categories.

Dr. Robert Wescott, Wescott Strategic Advisors: The top half of the curve are generally folks who own their own homes, and many of them have stock market wealth. They get investment fund statements every quarter, and everything that we see suggests they're still doing okay. There are still a lot of people booking flights to Europe these days for their summer vacations. And I think it's generally people on the top half of the K curve, whereas all those credit things, like delinquencies, are heavily concentrated on people in the bottom half of the K curve where they might not own their own home and likely are not getting nice quarterly statements on their index fund.

Q: What are the likely reasons for improvement in credit card delinquencies? 
Sojka: I believe that a lot of it is seasonality. The team and I, over the last several months, have talked about the tax refund season, which is February through June. During this time, consumers typically pay down or pay off their debts or they might pay current on past due accounts. That’s what our data is showing right now. So we're probably in our last two months of it with the data. We saw a little bit of slippage in auto, but bankcard is still improving. Originations are down, so there might be some tightening, although overall subprime share of originations is slightly up this month. So, the larger banks may be tightening up. But the benefit of that is the Fintechs. Fintech saw a huge increase in bankcard originations, and their delinquencies continue to improve.