Top Banks Preparing for an Increase in Loan Delinquencies
KEY POINTS
- Big banks are putting money aside and tightening their lending requirements as they expect delinquencies to rise.
- TransUnion research says high inflation and economic uncertainty could cause an increase in late payments.
- If you need to take on debt, try not to borrow more than you need and ensure the monthly payments fit in your budget.
Take these steps now to avoid impacting your credit with late payments.
Banks are adjusting their behaviors amidst growing fears that this year could bring higher delinquency rates and economic difficulties. This could mean consumers find it harder to qualify for personal loans and new credit cards. Big lenders and credit card issuers are already setting aside more money to cover potential loan losses.
For example, according to the Wall Street Journal, Capital One Financial set aside around $1 billion to cover potential losses in the fourth quarter -- up 33% on the quarter before. Other banks are also upping their loan loss funds.
Why loan delinquencies may increase in 2023
The last few years have put huge pressure on many Americans' bank accounts. The uncertainty of the pandemic was followed by sky-high inflation, swiftly followed by dramatic interest rate hikes. Now people are concerned about a potential recession and the impact it might have on their jobs.
High inflation and recession fears are just two reasons that credit reporting agency TransUnion predicts delinquency rates for credit card and personal loans will increase this year. "It's not surprising then to see pronounced increases in delinquency rates for credit card and personal loans, two of the more popular credit products," said Michele Raneri, TransUnion's vice president of U.S. research and consulting.
Stimulus and other pandemic payments meant many people put more cash into their savings accounts in 2020 and 2021. However, according to Federal Reserve data, those balances are starting to fall. Indeed, some people have taken on debt to cover higher living costs. The latest U.S. census data showed that a third of Americans used credit cards to cover essential costs in the initial weeks of January.
Sadly, these are all signs that people are struggling and that there could be more trouble on the horizon. Using savings or debt to cover expenses is understandable, but it's only a temporary solution -- at some point that money will run out. When that happens, people could start to fall behind with their payments. TransUnion predicts delinquencies will rise to levels not seen since 2010.
What increased loan delinquencies mean for your money
It's one thing to know that banks are getting ready for more delinquencies, but what does that mean for you? One big impact is that it could become harder to borrow money if you need extra cash. Lenders often tighten their requirements when the economy is struggling.
There are several factors lenders take into account when considering a loan or credit card application, but your credit score is an important one. Staying on top of your bills, paying down debt, and checking your credit report for errors can all help increase your credit score. It's also worth being strategic in applying for new credit as well, as each application can ding your score.
Another way to handle the banks' delinquency preparations is to avoid falling behind on your payments. Even one late payment can have a big impact on your credit score and potentially cost you money in fees. When you take on debt, make sure you understand what you're going to owe each month and how that will fit in your monthly budget.
Given the pressures on household budgets these days, it isn't hard to see why people are borrowing more. But try not to borrow more than necessary. If there are ways you can cut your spending or save up for purchases rather than taking on debt, in the long run it could cost you less and lower your risk of missing payments.
An emergency fund can also help you avoid loan delinquency. The idea is to have money stashed away in a savings account to deal with emergencies such as a job loss or other unexpected crisis. Not only can this help you to avoid taking on debt to cover an emergency, it can also help you stay on top of payments when life throws you a curveball.
If you do run into trouble making loan payments, talk to your bank or lender as soon as possible. It's tempting to ignore the problem, but if you explain your situation, you might be able to work together to find a solution.
Bottom line
Times are tough for many Americans right now and this year could bring more economic difficulties. If you find you need to take on debt to cover everyday costs, look for ways to reduce your expenses or increase your income. It isn't easy, but it could save you money and hassle further down the road.
Our Research Expert
Emma owns the English-language newspaper The Bogota Post. She began her editorial career at a financial website in the U.K. over 20 years ago and has been contributing to Motley Fool Money since 2019.
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