Plummeting credit health – Index at lowest since 2020

Consumer credit health is in the intensive care unit, and there’s a risk it could deteriorate further, according to the TransUnion SA Consumer Credit Index (CCI).

It fell the most on record in the second quarter (Q2) of this year, to 49 from a final reading of 55 in the first quarter.

This drop took the index to its lowest level since the third quarter of 2020.

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The index is used to measure credit health, where 50 is the breakeven point between improving and deteriorating.

The six-point drop was the index’s biggest drop on record, surpassing the five-point drop in the third quarter of 2020. All four subcomponents fell.

The index showed an increase in the use of credit cards, suggesting that consumers were relying on credit to absorb the higher cost of living.

The average level of three-month defaults increased year-on-year (y/y), despite a slight decrease (0.1%) quarter-on-quarter.

This was an early warning of an impending slowdown in consumer sectors. Household cash flow was under pressure, with prices rising more than incomes, and wage growth was not expected to catch up with the cost of living for some time.

New credit defaults (accounts overdue by three months) increased by 1% in the second quarter compared to the same period in 2021.

With interest rates rising, there seemed to be an increased risk that the default rate would increase. This is where distressed borrowing would come into play.

TransUnion determined distressed borrowing levels by looking at revolving credit (credit and store cards) used as a percentage of a consumer’s credit limit.

Distressed loans increased by 4%, compared to the same period last year, rising from 3.9% year-on-year in Q1, accelerating from 1% year-on-year in Q4.

Households seemed to be using credit to offset the rising cost of living. Compressed real cash flow growth from 8.3% YoY compared to the third quarter of last year to a contraction of -0.3% YoY in the second quarter of 2022.

With a prime interest rate expected to reach 10.25% by 2024, the average household will face a significantly higher interest burden unless they actively consolidate their accounts, pay down their debts and manage their debts. expenses.

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