"Personal Recessions" and Three Other Consumer Trends to Watch in 2023

Inflation is causing a “personal recession” for many American consumers. The Fed continues to raise interest rates, making the cost to borrow too high for some. Unemployment is at a 50 year low, but consumers don’t feel like their household finances are better off than they were a year ago.

These macroeconomic trends should inform collections & recovery executives’ strategy decisions for the next year and beyond.

To get a better understanding of consumer sentiment, spending, and other key trends, let’s break down three critical takeaways from TransUnion’s Q4 2022 Consumer Pulse Survey:

Spending is down, but there is some optimism.

In Q4 2022, 46% of consumers reported their household finances were worse than planned, a full 16 percentage points higher than Q1 2022. Fewer consumers reported increased wages in Q4 2022, and more consumers reported wage decreases compared to Q3 2022. Reductions in wages and worse-than-planned household finances are driving more consumers to make cuts to discretionary spending and reduce their savings.

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Consumers decreasing discretionary spending doesn’t necessarily mean they will have the ability to pay their current bills, though. 29% of consumers report that they expect to be unable to pay at least one of their current bills in full; a 1% increase from Q3 2022. That isn’t a significant increase, but this is a trend to watch as consumers run out of their pandemic cash and battle increased costs of necessities.

Despite those challenges, optimistic consumers report plans to increase discretionary spending and savings, with 20% of optimists planning to increase spending compared to only 7% of pessimistic consumers. The higher the consumer’s income, the more optimism they reported; those who have a reported income of at least $110,000 annually are most likely to report optimism.

Age affects optimism, too. As Millennials and Gen Z enter their prime earning years and gain more spending power, and Gen X and Baby Boomers approach retirement, 64% of Millennials and 61% of Gen Z consumers reported being optimistic about their finances in the next year, compared to 48% of Gen X and 43% of Baby Boomers. Baby Boomers and Gen X reported being less likely to seek new credit, as well.

The average American consumer is changing, which means collections strategies must change, too. Customer experience should be a top priority, and empathy will be critical, especially as consumers continue to battle inflation.

Credit applications are down slightly due to concerns about cost to borrow.

At 26%, the overall number of consumers who plan to apply for new credit or refinance existing credit within the next 12 months is down 3 percentage points from Q3 2022. Most of those consumers plan to apply for a new credit card, which is roughly the same as Q3 2022 at 53%. The number of consumers looking for new mortgages or to refinance their existing mortgages dropped off significantly (11% and 8%, respectively).

More consumers also reported abandoning a plan to apply for new credit or refinancing, and 32% of consumers did so because the cost was too high. As the Fed continues to consider interest rate hikes in order to work towards the goal of 2% inflation, consumers will likely continue to avoid new and refinanced mortgages. 26% of consumers reported that they abandoned their plan for new credit due to their credit history, which is the same number as Q3 2022.

If interest rates continue to rise, and originations continue to dip, collecting on existing debt should become a focus for lenders, especially those who are newer to lending. Check out my interview with Dave Hanrahan from Kredit for some tips for lenders who haven’t explored collections & recovery strategies yet, or if it’s been a while.

Consumers continue to prioritize credit report monitoring, and want to see changes to what’s reported.

Almost all of the consumers surveyed believe that monitoring their credit report is at least slightly important, with half reporting that they monitor their credit report at least monthly. Credit reporting continues to be an excellent way of reaching consumers about their accounts, despite the risks involved.

The number of consumers who monitor their credit report daily or weekly did drop from Q3 2022, which could signal that consumers who don’t rely on traditional credit (those who use Buy Now, Pay Later loans in lieu of traditional credit cards, or those don’t have a mortgage or car payment, for example) don’t see value in monitoring their credit report outside of checking for fraud.

In fact, 78% of consumers believe that their credit scores would either increase or stay the same if new information was reported, like rent payments or Buy Now, Pay Later loans. This follows a year in which the CFPB instructed BNPL servicers to prepare to report positive information about consumer payments.

Reminder: The CFPB has hinted at making changes to the FCRA in 2023.

Non-standard information on credit reports will result in a much better picture of consumer financial health for underwriters. If consumers are right about their scores staying the same or increasing, it will mean credit score increases and more credit availability. If they’re not, though, it could mean consumers have had artificially inflated credit scores, and it will mean even tighter underwriting standards and credit availability shrinking.

These macroeconomic trends should inform collections & recovery executives’ strategy decisions for the next year and beyond.

Consumer spending and credit behaviors make it clear: we might not have entered a disastrous recession as some predicted, but we’re not out of the woods yet. Read more about consumer trends from Q4 2022 in TransUnion’s full Consumer Pulse Survey from Q4 2022 here.

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