According to current data and bank executives, U.S. borrowers with lower incomes are finding it more and more difficult to make their loan payments. As a result, banks are becoming more cautious when granting credit cards and auto loans.

According to bankers and economists, an increasing proportion of Americans have seen their savings shrink as rising costs put pressure on their budgets and interest rates remain high. In contrast to individuals with greater wages, people making less than $45,000 saw a decline in their household finances.

The president of the Chicago Federal Reserve Bank, Austan Goolsbee, stated on Friday that one of the most alarming economic statistics at the time is consumer delinquencies.

“If the delinquency rate of consumer loans starts rising, that is often a leading indicator things are about to get worse,” he said.

According to Arijit Roy, who oversees U.S. Bancorp’s consumer division, borrowers who are first-time and have lower incomes are seeing greater loan default rates than borrowers with higher incomes.

Net charge-offs, or debts that are unlikely to be collected, increased to $1.5 billion at Bank of America in the first quarter from $807 million in the same period last year, primarily due to credit card debt, the bank said on Tuesday. Competitor JPMorgan Chase reported that charge-offs at Citigroup and Wells Fargo surged during the same quarter, nearly doubling to $2 billion.

Chief Financial Officer Alastair Borthwick informed analysts on an earnings call that Bank of America is witnessing “cracks” in the finances of borrowers with subprime credit ratings whose household spending is impacted by rising interest rates and inflation.

Friday’s closing price of US stocks was uneven, with the tech-heavy Nasdaq experiencing its largest weekly loss since October 2022.

However, he noted that most of its clients have better credit scores and are in good financial standing.

According to BankRate, the banks that service a greater number of subprime borrowers with credit scores between 300 and 600 include Capital One, Old National Bank, and First Mortgage Direct.

When contacted for comment, the lenders did not answer right away.

Lenders aim to prevent scenarios where borrowers fall behind on their payments to the point where the loans have to be written off, even though they profit from interest payments.

“Banks are trying to come up with early-warning signals for customers about their bill payments, offering debt counseling and educating the customers more so that they can stay on track,” said Tom Dent, senior vice president at the Consumer Bankers Association, an industry group.

Lenders are being increasingly cautious due to the mounting pressures.

“During situations like these, many banks adopt a cautious outlook and begin to optimise their balance sheets by utilising pricing strategies,” Roy stated.

According to a Federal Reserve Bank of Dallas study, banks increased borrowing rates in March, which resulted in a fall in loan volumes and further tightening of credit standards. Although it usually tracks nationwide trends, the poll concentrated on lenders with their main offices in Dallas, Texas.

According to a quarterly survey conducted by the Federal Reserve in January, loan officers surveyed separately stated they were tightening lending requirements, including for credit cards and auto loans. Many banks anticipated tightening the requirements for credit cards even further.

The retreat indicates that conservative lenders would temper loan growth, which is a major source of revenue, according to executives.

In the meantime, predictions that the Fed won’t lower interest rates until September have been strengthened by recent economic data. For overextended debtors, the higher borrowing prices may make matters worse.

However, the largest banks said that most customers were doing well.

This month, Jamie Dimon, the CEO of JPMorgan Bank, told analysts that Americans were continuing buying, despite the fact that people with lower salaries had mostly spent their extra cash.

“For now, we’re fine,” Dimon stated. “It does not mean we’re okay down the road.”

According to Mark Zandi, chief economist at Moody’s Analytics, credit cards were the most prominent source of weakness, but defaults on buy-now, pay-later loans were also on the rise.

“It is a tale of two consumers,” he said. “Back in the financial crisis, people were defaulting primarily on their mortgages but now it’s credit cards that are unsecured and have the highest rate of interest.”

Still, Moody’s stated in a research earlier this month that credit card and auto delinquency rates seem to be peaking.

The amount of debt held by American households has increased to an all-time high, and last year saw the first instance of credit card balances exceeding $1 trillion due to consumer borrowing.

According to Brendan Coughlin, head of consumer banking at Citizens Financial (CFG.N), opens new tab, many people who obtained credit cards saw their finances improve as a result of the pandemic stimulus programmes.

However, as Americans exhausted stimulus benefits and debt forbearance programmes came to an end, their financial safety nets shrank, leaving many consumers overextended.

“Credit scores were artificially inflated with increased savings and lower spending,” said Coughlin. Credit card delinquencies are a key indicator to watch because they are “a representation of people living beyond their means,” he added.

According to data from the U.S. Bureau of Economic Analysis, Americans saved 3.6% of their disposable income in February, down from 4.7% a year earlier.

Credit score modelling firm VantageScore reports that overall consumer delinquencies in February were 0.98% across all loan categories, including credit cards, auto loans, and mortgages. It made clear that throughout the past few months, the number has been climbing.

According to the research, consumers with low incomes—defined as those making less than $45,000 annually—faced more financial strain, and the proportion of American borrowers with the best credit scores is declining.

(Adapted from Reuters.com)

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