Rising Debt Levels & Implications for Portfolio Risk

Total household debt rose by $16 billion to reach $17.06 trillion in the second quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York.

Credit card balances rose sharply between the first and second quarters, growing by $45 billion, a 4.6% increase that pushed total credit card debt past the $1 trillion mark for the first time, according to the report.

As debt levels have grown nationwide, so has the rate of credit card delinquencies, topping 5% in July, the last month for which complete information was available. Analysts expect this figure to continue rising as inflation increases. The rising rates have also prompted credit card firms to boost their own rates and to increase minimum monthly payments.

Data-Driven Portfolio Monitoring is Essential

In addition to higher credit card balances, many consumers are now being impacted by the re-start of federal student loan payments, which had been on hold for a little more than three years.

With many consumers facing increased credit obligations, it’s more important than ever that lenders take a 360-degree view of their portfolios for more strategic, data-driven decisions.

There’s not enough time to manually review these portfolios regularly. Instead, lenders need to look to automation. Automatically generated notifications that alert team members of potential problems before a loan becomes delinquent are key. These alerts can be configured to rely on complex score and behavioral logic, and can be set to run on a daily, weekly, monthly or quarterly basis. As a result, monitoring is happening on a continuous basis and your team can rest assured that the loan portfolio is protected from unnecessary risk exposure. Early warnings of potential delinquencies can help financial institutions get ahead of problems so that they can step in to help consumers find the best path forward with their debt before small problems become much larger.

Financial Literacy 101

Not only is credit card debt on the rise, fewer people are paying off their balances each month, which means more potential risk for lenders. For banks and credit unions, this signals an opportunity to help customers or members by educating them on how best to manage these debts.

Offering financial literacy harkens back to the roots of why community financial institutions exist in the first place: Helping their customers prosper financially. While a credit card can help in an emergency or take advantage of a larger than normal discount on a product or service, they aren’t meant to be long-term financing vehicles. A credit card balance carried over an extended period of time can result in the cardholder paying more in interest over time than the cost of the initial purchase. Yet not everyone has a full understanding of proper personal financial management and what needs to happen to foster a positive financial future.

As Gen Z comes of age and begins taking on more credit, this concept of financial literacy will be crucial because it hasn’t been taught in schools, and this generation had enjoyed low interest rates and easy access to credit until the last year or two. Many also had college loans that were in deferment, or with suspended repayment.

Engaging the Next Generation of Borrowers

Gen Z’s total bank credit card balances increased 51.9% year over year in the second quarter. A TransUnion pulse report for July 2023 found that 50% of Gen Z borrowers plan to apply for new credit or to refinance existing credit within the next year.

The right policies will be key to engaging future borrowers. Those policies may need to include educating them and empowering them to adopt healthy financial habits so they have income to use (responsibly) for future deposit and loan products. However, as important as good credit policies and financial literacy are, banks and credit unions should also employ the right risk management practices to protect their portfolios now and with future generations of borrowers.

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