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Approximately 2.53% of consumer loans held by commercial banks in the US were reported as delinquent in the third quarter of 2023. While this delinquency rate had previously declined from its peak of 2.47% in the first quarter of 2020, it has since resumed an upward trend beginning in 2021.

Source: Statista

The recent sharp increase offers a glimpse into the declining financial well-being of consumers throughout 2023 and also raises red flags about future upticks in delinquencies and charge-offs. While eliminating debt remains a primary financial objective for consumers in 2024, recent findings from Happy Money highlight making loan repayment a priority, beginning with credit card debt that has soared past a trillion dollars in 2023.

Happy Money is a fintech lender that works with credit unions (CUs) like federally chartered USALLIANCE Financial and Illinois state-chartered Alliant to provide personal loans for debt consolidation, specifically targeting high-interest credit card debts.

Many consumers are already limiting their use of traditional card-based payments and opting for emerging alternatives like Pay by Bank. This reflects their resistance to relying on credit cards to avoid loan stacking and hindrance to obtaining credit in the future.

With consumers increasingly embracing Pay by Bank, this solution is also being recognized by merchants for smoother back-end business operations. Responding to the growing mutual interests of consumers and merchants, Adyen and Plaid last year announced plans to introduce a Pay by Bank enterprise payment solution to North American merchants in early 2024.

But how can credit unions and lenders further support consumers in managing debt and averting delinquencies and loan defaults in the future?

“It’s not just about providing a loan, but also ensuring that our consumers can comfortably and successfully repay it,” said Adam Zarlengo, Chief Product Officer at Happy Money. 

According to Zarlengo, lenders, particularly CUs, can employ some data-driven techniques to alleviate delinquency rates while simultaneously providing convenience for borrowers. 

For instance, he mentions implementing built-in guardrails in the underwriting process to prevent over-extending debt and offering flexible payment options to cater to consumers belonging to varying financial backgrounds. Providing protection insurance that can extend up to a few months of payment coverage in case of a job loss or disability can also be of help as those are common causes of default.

Once consumers are on track with maintaining positive cash flow and reducing debt, they can also think of prioritizing building emergency funds for added financial security. Credit unions can educate consumers about high-yield savings options to accelerate their savings, such as Certificate of Deposits (CDs) offered locally or credit union savings accounts with higher interest rates than banks due to their not-for-profit business structure. 

“Implementing these strategies for managing charge-offs and promoting consumer financial wellness can result in increased member loyalty, too,” noted Zarlengo.

In addition, Zarlengo believes that by slightly adjusting their financial habits, consumers can work in tandem with lenders to steer clear of defaults, such as setting up automated credit card payments, monitoring expenses, breaking down large financial goals into smaller steps, prioritizing high-interest debt repayment, and considering debt consolidation to reduce overall interest payments.

While traditional budgeting methods have been common for a long time, a new trend called loud budgeting has been gaining popularity since the beginning of this year. TikTok’s newest finance trend urges consumers to set clear financial boundaries and openly declare their spending limits. It’s about boldly stating how much they intend to spend, reflecting a conscious decision rather than financial constraints.

While financial misinformation often pervades TikTok, this emerging trend carries a silver lining. Advocates believe it’s breaking the long-standing taboo surrounding financial matters and debt, which have been historically stigmatized. Young people are particularly drawn to this trend as it offers a fresh approach through open discussions about their expenses and financial situations.

“This trend can be powerful for borrowers, as well as anyone looking to take control of their finances and build a better future,” Zarlengo said.

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