Credit Cards Rise in Payment Pecking Order Under Stress

Borrowers with both a personal loan and a single credit card became more likely during the pandemic to keep up payments on their card than their loan, according to a TransUnion survey released Wednesday.

The Chicago credit reporting and analytics company studied trends in the United States, Canada, Colombia, India and South Africa and found that before 2020 borrowers in every region prioritized their personal loans over their credit card.

“This trend was largely driven by the presence of multiple cards in wallets, which allows consumers to go delinquent on one or more of their credit cards, while paying their primary card and preserving its use,” the report said.

Those trends began to change during the pandemic as digital transactions became more common and necessary.

“In the United States, consumers consistently prioritized their personal loan repayments over credit cards before and after the pandemic. However, the gap between personal loan and card delinquency narrowed following the COVID-19 pandemic and corresponding economic crisis,” the report saidl.

Among U.S. consumers who had at least one credit card and at least one personal loan, their 30-day-plus delinquency rates in September 2019 were 2.9% for credit cards and 1.5% for personal loans. In September 2020 the rates were 1.8% for credit cards and 1.1% for personal loans. On average, borrowers in this group had three credit cards and one personal loan.

However, when TransUnion isolated borrowers who had just one credit card and at least one personal loan, they found credit cards had a slightly lower delinquency rate during the pandemic. This was true in every country it studied — except Canada.

While U.S. borrowers with more than one credit card prioritized personal loans, the payment hierarchy reversed for single cardholders from the first through third quarters of 2020.

U.S. borrowers with only one credit card made up 20% of the study population. Their 30-day-plus delinquency rates in September 2019 were 2.6% for credit cards and 2.4% for personal loans. By September 2020, the rates were 1.5% for credit cards and 1.7% for personal loans.

Matt Komos, TransUnion’s head of research and consulting in the U.S., said the finding underscores the importance borrowers placed on keeping a credit card during the pandemic.

“If you only have one credit card and you were worried about visiting stores at the height of the pandemic, there’s a strong likelihood you will preserve that card to continue spending and making digital transactions,” Komos said.

“If you possess three cards, though, it’s far more likely that you will go delinquent on one of them before you do so with a personal loan if you are facing financial hardship, as many consumers can continue to get by as long as they have access to at least one card,” he said.

Not surprisingly, TransUnion found the payment priority for borrowers’ primary cards was far higher than their secondary cards.

TransUnion also studied payments from 27.8 million Americans who had at least one auto loan, credit card and mortgage. Mortgages were far and away the highest payment priority.

Of the 5.3 million who had only one credit card, mortgages remained the top priority, but they began placing their credit card payment ahead of their auto loan payment starting in the second quarter of 2020.

For lenders, the tricky part has been knowing when their card has shifted in preference, and knowing how to move it to the top-of-wallet position. TransUnion, which sells trended data services, said that kind of information can be useful to track preference both to manage portfolio risk and to increase preference through targeted promotions.