BORROWERS WITH LOW CREDIT SCORES MISSING PAYMENTS

In March, the proportion of payments on car loans, personal loans, and credit cards that were at least 60 days late rose for the eighth consecutive month, according to Equifax, one of three U.S. credit bureaus.

For the month, 11.1 percent of credit cards issued to people with credit scores below 620 fell into that group, compared to 8.3 percent in July 2021.

Low-scoring borrowers made up 11.3 percent of the late payments; in July 2021, the number was 7.5 percent.

The number of delinquencies in February was the highest since at least 2007 and increased in March.

Many of the troubled borrowers are “subprime,” meaning they had low credit scores when the loans were made or the cards were issued.

Delinquencies declined during the COVID War as government stimulus checks padded bank accounts and the U.S. Federal Reserve pushed interest rates down near zero.

That allowed people with shaky credit to pay down debts or pay them off and build up their savings, enabling them to qualify for loans and new plastic.

Now the stimulus money has been used up, no more is forthcoming, rampant inflation is chewing up everyone’s budget, and the Fed has embarked on what many expect will be a year-long journey to arrive at a base interest rate of as much as 3 percent by year-end, compared to 0.25 percent at the beginning of this year.

Although “we are in the best credit environment we have seen in our lives,” Wells Fargo CEO Charles Scharf said last week at The Wall Street Journal’s Future of Everything Festival, “there will be deterioration in people’s ability to pay.”

Although mortgage lenders have remained firm in their lending standards, many other lenders took a chance on subprime borrowers last year in an effort to grow their loan portfolios, which shrank precipitously during the COVID War as people paid off debts.

As a result, in 2021 the dollar amount lent to subprime borrowers, as well as the amount of credit issued to them on credit cards, set records.

Many lenders characterize the rising delinquencies as a “normalization” of the credit market as it returns from the artificial financial environment of rock-bottom interest rates and government payments to households, the WSJ reported.

“It would be unnatural for credit to stay where it is,” Capital One CEO Richard Fairbank said in a recent earnings call reported by the WSJ. “This is an across-the-board return to normal.”

TREND FORECAST: As inflation continues unabated due to shortages, the Ukraine war and Western sanctions, China’s lockdown, and garbled supply chains, the number of failing loans will surpass “normal” and approach crisis levels.

Anticipating just this trend, JPMorgan Chase set aside $900 million in its first quarter this year to cover loans that go bad, even though the move sank the bank’s quarterly profits by 42 percent, as we reported in “JPMorgan Profits Down 42 Percent on $900-Million Set-Aside” (26 Apr 2022).

Also, corporations—especially those that borrowed heavily during the COVID War—face the same pressures that households do. The number of corporations falling behind on payments, and into default, also will rise, with corporations that have issued junk-rated bonds falling first.