A recent one TransUnion survey shows that while credit card use is increasing across the country, so is borrowing in general. More specifically, the use of unsecured personal loans for credit card consolidation.
The “Debt Consolidation in a Rising Economy” study found that those who used an unsecured personal loan to consolidate their high-interest credit card debt saw their debt decrease significantly, but only in the short term.
What does this increased propensity to borrow mean for consumer lending, especially in a high interest rate environment? Experts say more targeted marketing and consumer awareness are key.
Consumers are swiping away the plastic as inflation and tariffs skyrocket
As inflation soars to unprecedented levels in 2023 and interest rates rise to historic levels, American consumers are turning to credit more than ever. In August, the New York Federal Reserve reported that overall credit card balances had increased over $1 trillionincreasing by $45 million between the months of April and June.
Ted Rossman, Industry Analyst at Bankrate, says this increased credit usage can be attributed to users understanding and leveraging their credit card rewards, and consumers using credit to make ends meet due to the higher cost of living due to inflation.
“Just over half of cardholders avoid interest by paying in full each month, so credit cards work for them, in terms of rewards and buyer protection,” Rossman noted in an August study of Bankrate debt.
While many consumers are able to make these monthly payments, a recent survey from Bankrate found that 47 percent of cardholders reported transferring their credit card balances, up from the 39 percent who reported doing so in December 2023.
Research shows that more consumers took out loans for credit consolidation in 2023
This high-credit market, combined with inflation and ever-higher interest rates, has resulted in increased use of unsecured personal loans for credit card consolidation, TransUnion’s research shows.
From 2020 to 2023, the share of unsecured personal loans (UPLs) used for credit card consolidation increased by approximately 54 percent in the third quarter of 2023 compared to pre-pandemic borrowing levels in the third quarter of 2019.
“As the Fed has raised interest rates in hopes of curbing inflation, many consumers have turned to unsecured personal loans as a way to consolidate their credit card debt and get a lower interest rate,” said Liz Pagel, senior vice president and head of TransUnion’s consumer organization. lenders said.
“These consumers not only save on interest over time, but also see an improvement in their credit scores,” she added. For most, however, the decline in lending was short-lived, lasting only about 18 months.
More than half of the consolidators saw significant, short-term debt reduction
Between April 2023 and September 2023, 57 percent of those who consolidated saw a decrease in their overall credit card balance.
Unfortunately, TransUnion’s research found that a majority of those with reduced balances had balances that returned close to previous levels within 18 months of consolidation.
Margaret Poe, head of consumer credit education at TransUnion, comments on the effectiveness of consolidating credit with a UPL to free up your budget while paying off debt. “However, it is important to combine this with changes in spending habits to ensure credit card debt does not return,” she advises.
Prime or higher risk borrowers saw continued lending increases
While most borrowers saw no debt reduction over the long term, TransUnion found that borrowers who fell into the prime and above-risk tiers were more likely to see sustained net improvement in their credit after 18 months.
It was also found that those who chose to consolidate their credit card debt were more likely to fall into the high-risk or above-risk category, while those who refinanced and non-debt consolidators fell more toward the below-higher-risk category.
“Personal loans used to pay off other debts tend to perform better than the access loans used for a large purchase or something,” says Pagel. “It’s a smart consumer,” she adds, explaining the average consumer who uses a loan to consolidate credit.
“It’s someone who cares and is actively trying to manage their wallet and their monthly payments… You discover the consumers who already care about their monthly payments and are concerned about the amount of interest they’re paying,” she notes, adding that it is self-fulfilling that these types of consumers seek these loans to improve their creditworthiness.
Intermediaries saw fewer reported delinquencies
Regardless of risk level, most consumers who took steps toward simplifying debt repayment saw greater financial benefits. “Across all risk levels, credit card consolidators and UPL refinancers had less severe delinquencies over time compared to non-debt consolidators,” the study’s market briefing said.
Debt consolidators are reasonably better overall, according to the results
Based on the type of consolidation, the level of risk and the long-term results, the study found that those who consolidated their high-interest credit card debt experienced more positive results overall.
TransUnion’s market briefing stated that the research clearly shows that intermediaries are a more attractive option for lenders. “On average, they outperform consumers who do not take steps to consolidate their debts,” the report said.
How to Manage High Interest Credit Card Debt
If you have been putting more purchases on credit and have had difficulty managing your debts, consolidating with a UPL can help you increase your credit and better manage your balance, but only with on-time payments and positive repayment in the long run term. history.
Keep in mind that personal loan rates have reached record highs in recent weeks, partly due to inflation. However, you must pre-qualify with multiple lenders to see your predicted rate. It’s likely that your loan interest rate will be much lower than your credit card interest rate.
Regardless of the repayment method you choose, Pinata CEO Lily Liu advises consumers to fully understand their debt and its potential impact on long-term credit health. “Whether it’s personal loan debt or credit card debt, it always comes with a hard price,” she says.
Create a repayment plan to avoid persistent debt and credit damage
Liu goes on to explain how important it is to understand the details about your specific type of debt and its interest accrual so that you can create a repayment plan that works for you and doesn’t have to deal with the potentially long-term effects of unpaid debt on your credit.
“Unlike a lot of things, it’s not an in-your-face thing every day,” she says, referring to borrowers’ credit scores and history, urging borrowers to set up a repayment plan to minimize potential damage. “Debt has one of the biggest consequences [on credit] and it is weighed differently by the credit bureaus.
“So unlike other recurring payments with no debt reported to the bureaus, a personal loan and credit card debt will have one of the biggest impacts on your credit score,” she adds.
