Americans’ Credit Health At Risk As Debt Levels Soar
The road to financial recovery has proven bumpy for many, mostly younger, Americans. Recent data reveals an alarming trend of falling credit scores, exposing an inconvenient reality about the country’s economy. Despite an initial boom in credit health thanks to government assistance and a pause on student-loan repayments in response to COVID-19, the celebration was short-lived as credit scores are falling.
Synchrony Financial, a Connecticut-based consumer financial services company, has observed this startling financial deterioration. As the macroeconomic climate grows more uncertain, Synchrony has started closing inactive accounts and capping credit card limits. Brian Wenzel, CFO of Synchrony Financial, stated, “Folks who had paid down debt, their scores had gone up, and now they’re reverting back to more normal performance.”
This stark shift paints a grim picture of the nation’s financial health. American consumers, who for a time had savored the sweet taste of credit score improvements, are now struggling. An inflation storm of two years has coerced many into draining their savings and leaning heavily on credit cards to stay afloat. It is not surprising, then, that consumers have amassed record amounts of credit card debt while interest rates on that debt have surged to an average of 21%.
This backslide of credit scores into subprime territory is concerning, particularly considering the consequences of a lower score. It could severely restrict consumers’ ability to qualify for new credit lines, effectively cutting off a lifeline many have come to rely on. Desperate times have led to a surge in Google searches for “pawn shop near me,” indicating consumers are resorting to quick loans for desperately needed cash in exchange for their belongings.
The struggles for the American consumer may soon compound. As student loan payments are set to resume shortly, millions will have to divert more income into debt servicing payments. The situation raises concerns about consumers heading into a potential balance sheet recession.
Amid these challenges, Synchrony Financial remains cautiously optimistic. Despite a 29% slump in net income in the second quarter and a worrying uptick in credit-card charge-offs, the company’s shares have risen by 10% this year, outpacing the 1.9% advance for the S&P 500 Financials Index.
Wenzel commented that while “credit continues to normalize slower” than at other firms, it was a concern they had anticipated. However, the company also believes that some issuers may have overextended consumers. As Wenzel said, “It’s that migration into deeper subprime or nonprime that you want to be worried about.”
In a society where a three-digit number can influence your financial life, the sudden drop in credit scores is alarming. As a senior industry analyst at Bankrate, Ted Rossman, notes, “Higher scores usually result in more favorable credit terms, and lower scores make it more difficult to qualify for competitive rates.” Now, with scores falling from the 680-690 range to around 620, the financial future of many consumers hangs in the balance.
