Borrowers on the whole were able to accommodate the interest rate hike initiated by the Federal Reserve in December, with most successfully continuing to manage their monthly payments after the rate went up, according to a recent analysis by credit reporting agency TransUnion. Of the 63 million borrowers assessed in the analysis—borrowers whose monthly payments are affected by the market rate—just one million became delinquent three months following the rise.
Researchers followed borrowers’ payment behavior through March 2017 using TransUnion’s aggregate excess payment (AEP) algorithm, which takes into account credit card and mortgage payments, among others. Roughly 10.5 million of the borrowers evaluated were determined to be at a higher risk for failing to adapt to the rate rise. Their prediction ended up bearing out only for a fraction.
“We’re pleased to see that only 10 percent of those consumers we had considered at elevated risk of payment shock from a rate increase exhibited delinquency over the study period,” says Ezra Becker, senior vice president of Research and Consulting at TransUnion. “Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase.”
Seventy percent of the one million borrowers who became delinquent also carried higher balances in March than they did prior to the hike.
“Minimum payments are as much a function of balances as they are of rate,” Becker says. “Increased balances can lead to liquidity constraints regardless of how rates move. Consumers should always be careful to manage their credit usage within the limits of their income.”
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