Consumer Credit Growth Slows as Lending Standards Tighten: Kiplinger Economic Forecasts

As the economy braces for a recession, consumer credit growth is beginning to wane. To help you understand what is going on and what we expect to happen in the future, our highly-experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest...

Higher interest rates are starting to chill consumer credit growth. Per the latest data, consumer debt levels are still on the rise, but the pace of growth is slowing. Outstanding balances for all types of consumer credit rose 0.2% in May, while year-over-year gains eased from 5.4% in April to 5.3% the next month. 

Most types of consumer credit products are showing signs of weakness. Growth in outstanding auto loan balances faded to 5.4% in May, from 5.6% in April. Growth in credit card balances, meanwhile, moderated from 17.9% to 17.5%. That said, the share of borrowers who carry a monthly balance on their credit cards is trending above pre-pandemic levels, and demand for housing-related credit to buy a home or to tap into equity remains strong, despite rising mortgage rates. 

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Delinquency rates for credit cards and auto loans will increase this year. The delinquency rate for all consumer credit products increased to 1.49% in May. While still below pre-pandemic levels, it has rebounded quickly over the past year. Auto loans already have a late-payment rate higher than February 2020 levels, and rising interest rates plus a slowing economy will cause others to follow suit. 

Note that lending standards will also tighten over the rest of the year. Banks are pumping the brakes on consumer credit. According to the latest survey of senior loan officers, a quarter of banks are tightening credit card lending terms.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.