A new study from TransUnion shows the measures many Americans take to rid themselves of high-interest credit card debt are but a temporary reprieve. “Debt Consolidation in a Rising Economy” describes how many turn to unsecured personal loans to consolidate their debts. Data generated between April 2021 and September 2022 was analyzed. The metrics included changes in cross-wallet credit balances, impacts on credit scores and relative loan performance.
The study compared consumers who sought unsecured personal loans with those using new unsecured personal loans to refinance existing ones or for other reasons. Consumers who used unsecured personal loans to consolidate credit card debt were more likely to be in the prime or above risk tiers as opposed to unsecured personal loan refinancers and non-debt consolidators who were weighted toward below prime.
Credit card debt consolidators saw a decrease in their credit card balances of 57%, on average, after consolidating. Good news in the short-term, but those balances often returned to close to the original amounts 18 months later.
“As the Fed has raised interest rates in hopes of curbing inflation, many consumers have turned to unsecured personal loans as a way to consolidate their credit card debt to get a lower interest rate,” said Liz Pagel, senior vice president and head of TransUnion’s consumer lending business. “After paying off credit card debt and increasing open to buy on their cards, these consumers not only save on interest over time, but they also see an improvement to their credit scores.”
“Consolidating credit card debt into an unsecured personal loan can be a good option to pay your debt off while freeing up funds in your monthly budget,” added Margaret Poe, head of consumer credit education at TransUnion. “However, it’s important to pair this with changes in spending habits to ensure that the credit card debt doesn’t return.”
Those consumers who used unsecured personal loans to consolidate their credit card debt saw, on average, an 18-point increase in their credit scores. Prime and above consumers held those gains 18 months later. Near-prime and subprime credit card debt consolidators saw their scores decline over that period. Across risk tiers, consumers who used loans for consolidation performed better on those loans over time.
Unsecured personal loan refinancers and non-debt consolidators saw minor declines in their credit scores, which persisted at least 18 months after consolidating regardless of risk tier.
“Lenders would be best served to leverage credit data to identify potential borrowers likely to benefit from debt consolidation or seeking a debt consolidation loan,” Pagel said. “Additionally, lenders can leverage non-credit-based marketing data to help tailor messaging to identified prospects. When correctly applied, insights from credit and marketing data can lead to better-informed prescreen strategies, as well as stronger approaches to underwriting and marketing messaging that are more apt to resonate.”