Multiple interest rate rises and high inflation are squeezing consumers, report says
New research conducted by credit bureau illion has revealed concerning levels of financial stress among households, raising alarm for credit managers.
The inaugural credit risk barometer from illion indicates that the recent financial strain caused by multiple interest rate rises and high inflation is starting to impact consumers' credit holdings, with credit default risk consistently increasing since late 2022, the credit rating bureau reported.
This rise in credit risk poses a significant challenge for credit managers in 2023, as they must balance sustainable business growth with higher risk. To understand the magnitude of the problem, illion analysed the credit behaviour of over 18 million Australian consumers and found that the risk of credit default has risen by 9% since January 2022.
The increase has been particularly sharp since November 2022, suggesting that financial stress is affecting consumers' borrowing habits as savings decline and wages struggle to keep up with rising living costs.
“Over Q1-2023 credit default risk has risen by six per cent, outstripping the rise over 2022 (three per cent) and over the same period last year (two per cent), suggesting that the impact from dwindling savings and negative cash flows has only recently become visible in consumer credit holdings,” Michael Landgraf (pictured above), manager of bureau analytics at illion, said in a news release. “Rising consistently since November 2022, the credit default risk may indicate that the financial strain on consumers is getting harder to ward off.”
Mortgage impacts
The research highlights a significant rise in the “30+ days past due” rate for revolving credit facilities, which is 9% higher in March 2023 compared to 2022. Additionally, delinquent home loans have increased by 5% year-on-year in March 2023, suggesting that consumers are falling behind on all credit obligations, including their primary home loans.
The strain on household finances extends beyond mortgage holders. After a period of stable saving rates, there has been a sharp decline in savings since mid-2022. In March 2023, savings balances were nearly 30% lower compared to the same period last year, with a significant drop of around 40% since October 2022. This indicates that balances are not yet recovering, raising concerns about the need for further spending cuts.
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“Preliminary observations of savings trends to May 2023 indicate that a rebound is not likely anytime soon,” Landgraf said. “The data also appeared to imply that balances may not fall much further, indicating that consumers may have used much of their savings buffer and that harder cuts to spending may be needed.”
Rental expenses have increased by over 20% since early 2022, adding to the financial pressure. However, there are early indications that the rise in rents may be moderating, offering some short-term relief to renters.
The credit risk barometer also reveals a broader increase in basic living expenses, with no post-Christmas decline in supermarket expenses as seen in previous years. This suggests that spending on essential items is stretched, and consumers may shift towards cheaper, lower-quality grocery staples.
Alongside rising living costs and deteriorating credit risk, there has been a 40% increase in applications for revolving credit by April 2023. While this could be attributed to a general resurgence in credit cards, it may also indicate that consumers are using credit to defer financial obligations, which raises concerns.
The combination of rising household and rental costs, increasing credit demand, credit delinquency, and lower savings may signal potential credit losses. To mitigate these risks, credit managers should apply robust affordability criteria and risk assessments to new applicants while providing financial support to existing customers, such as refinancing and payment deferral options, illion said.
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