A new analysis from TransUnion found that 10.6 million Americans could struggle to absorb their increased monthly payments after the Federal Reserve Board raised interest rates in December, however further examination showed only 1 million struggled with being delinquent after the rate hike.
TransUnion's study identified 63 million consumers who carried debts where the minimum monthly payments was tied to the market interest rate, and would be effected by rate hikes. Using its CreditVision aggregate excess payment algorithm, TransUnion found that 10.6 million consumers were at an elevated risk of not being able to absorb the 0.25% rate hike.
The average change in monthly payments was an increase of $18 after the December rate hike, according to TransUnion. Despite the low amount, it created a challenge for 1 million consumers who were delinquent in their mortgage payment by the end of March.
“When we announced our capacity to absorb a rate increase metric last May we said that it was a conservative measure of risk, in that it did not account for contributions to savings or investments that could be reallocated to cover debt service increases,” said Ezra Becker, TransUnion senior vice president of research and consulting. “We described our metric as an upper bound on the number of consumers who would struggle with a rate increase.”
“We’re pleased to see that only 10% of those consumers we had considered at elevated risk of payment shock from a rate increase exhibited delinquency over the study period,” Becker said. “Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase.”
Back in September, TransUnion released a study that showed the rate hike could cause a payment shock for 9 million borrowers.
TransUnion's control group was made up of 44 million consumers which held no variable-rate credit products, and therefore were not vulnerable to interest rate increases. About 13% of consumers in the control group fell into delinquency by the end of March, a higher delinquency rate than the rest of the test group.
“It was really surprising to us that the control group exhibited greater delinquency rates than those vulnerable to a rate increase in our study,” Becker said. “There are clearly some interesting dynamics at play here that we don’t yet fully understand, but this initial study does seem to indicate that the 0.25% interest rate increase in December did not drive any material delinquency in the immediate term for consumers.”
However, TransUnion cautioned consumers and lenders, saying while this study showed only 1 million consumers were impacted in the first quarter, it did not examine long-term impacts of a rate hike. For example, many consumers could be dipping into their savings accounts to meet the new obligations, and could eventually exhaust that source of funds.
“It is important for both lenders and consumers alike to be cognizant that a rising-rate environment presents a different dynamic than a steady-state or falling-rate environment,” said Heather Battison, TransUnion vice president of consumer communications. “For lenders, a rising-rate environment does present the risk of default due to payment shock.”
“For borrowers, there is now a need to recognize and plan for the fact that rising rates may cause their monthly payment obligations to increase,” Battison said. “The key for both parties is awareness and planning.”
“Above all else, consumers should keep in mind the foundational principles of credit health, which are especially crucial when working to build credit,” he said. “It’s imperative to make the minimum payment due, on time, on all of your bills.”