If you’re already carrying a hefty amount of student loan, mortgage or card debt, you may have a tough time convincing your lender you deserve another loan. A new survey from the Professional Risk Managers International Association and FICO found that the majority of bank risk professionals cite high debt-to-income ratios (which compare how much debt you owe to how much money you take in) as their biggest source of worry when deciding whether to approve a new loan.
“As consumer confidence picks up and people increase their borrowing, lenders are understandably concerned about growing indebtedness,” said FICO’s Mike Gordon in a press release.
After watching borrowers sharply retreat from credit cards and other high interest forms of debt in the aftermath of the Great Recession, many lenders are glad to see that consumers are tentatively embracing higher balances on their cards and seeking out other forms of debt, such as auto loans and mortgages.
According to July’s consumer credit report from the Federal Reserve, card balances jumped 2.5 percent in May after skyrocketing by a record-setting 12.3 percent the previous month. The last time credit card balances grew that quickly was in 2001. Total consumer indebtedness — excluding home loans — jumped 7.4 percent in May after increasing 10.2 percent in April.
Lenders are now becoming wary of seeing loan balances grow too quickly — especially since it could mean some borrowers are starting to shed the ultra cautious habits they picked up during the recession. That’s especially true for credit card holders, since heavier card use often means consumers may be returning to their spendthrift ways.
As the economy continues to slowly improve, numerous analysts have vacillated between hoping for a return to more robust consumer spending — which is a major driver of the U.S. economy — and worrying that some consumers might overdo it and return to spending far more than they earn.
“For the last two quarters, around 65 percent of our respondents said they think credit card balances are headed higher,” said Gordon in the release. “Those are the two highest figures we’ve ever seen in this survey. When I talk with bankers, they tell me they’re happy to see growing consumer optimism, but they’re wary of a return to reckless borrowing.”
According to the survey:
- 63 percent of lenders expect credit card balances to jump over the next six months.
- Nearly 48 percent think they will see a significant increase in applications for new credit.
- More than 59 percent think borrowers will seek more credit overall.
- More than 52 predict interest rates will start to rise.
- Just over 45 percent think lending institutions will increase the total amount of credit they approve.
Meanwhile, lenders are becoming increasingly leery that they may see more delinquencies (late payments by 30 days or more) in the months ahead, say researchers — especially for categories such as credit cards and student loans. More than 43 percent of bank risk professionals think late card payments are bound to increase, while fewer than 39 percent think credit card delinquencies will remain close to where they are now. (Credit card delinquencies are currently near historic lows and have been for some time.)
In addition, nearly 52 percent of those surveyed think late payments on student loans are destined to become more common in the months ahead. Just 6.4 percent — a record low, according to FICO — are more optimistic and think the number of recent grads who miss a payment will drop.
Worried too soon?
Lenders’ concern over rising consumer indebtedness is understandable, given how close we still are to the Great Recession. But it may be way too soon to start worrying about consumers’ spending habits — especially since consumer spending is still relatively weak. According to the Commerce Department, consumer spending grew by a measly 0.2 percent in May after growing by 0.1 percent in April.
A separate survey released in June by the American Bankers Association found that consumer credit card use is indeed rising; however, a growing number of cardholders are paying off their balances each month rather than letting card debt accumulate.
The American Bankers Association also reported Thursday that bank card delinquencies fell again in the first quarter of 2014 — indicating to analysts that consumers are still exceptionally disciplined with their plastic, despite using it more often. “Bank card delinquencies remain at surprisingly low levels even as credit card spending increases,” said Chessen in a press release.
“Consumers have a greater capacity to meet their financial obligations due to an improving economy, low interest rates and the significant deleveraging they’ve done in recent years,” he added. “A disciplined approach to managing debt has helped people improve their financial positions, keeping delinquencies near historical lows.”