LendingClub: Decline in Paycheck-to-Paycheck Ranks Is ‘Encouraging’

At first glance, there’s reason to be optimistic when viewing the current state of the paycheck-to-paycheck economy.

Joint research from PYMNTS and LendingClub shows that 60% of Americans were living paycheck to paycheck in January, down from 64% in December.

Anuj Nayar, financial health officer at LendingClub, told PYMNTS that “it’s too early to indicate a real trend. But the initial data is encouraging.”

Generally speaking, he said, consumers have accepted that inflation is becoming a part of their everyday lives — and they’re actively making changes to their financial habits and behaviors as the new, inflation-fueled reality warrants.

“We saw this really come to the forefront during the 2022 holiday season,” said Nayar.

Headed into the end of the year, more than a quarter of consumers surveyed said that they had planned to pull back on holiday spending versus 2021 levels or planned to spend nothing at all. The more recent data shows that a vast majority of consumers living paycheck to paycheck have made at least one “card management adjustment,” and 50% of these consumers with issues paying their bills have cut down their spending on “everyday pleasures.”

Credit Cards Still Popular

Beyond that restraint on the part of the consumer, Nayar noted that credit cards have proven to be a popular choice for consumers when they have been spending. As many as 72% of consumers said they used a credit card for at least one holiday purchase last year. But the most recent data shows that these same consumers are not experiencing a significant financial hangover from their 2022 holiday spending. (Only 13% said they’ve been left strapped by the holiday gift-giving season.)

“Consumers are starting to use different types of credit — as a tool, and not as a crutch to manage their savings,” said Nayar. “They’re focusing on nondiscretionary spending and looking at what they’ve got left in terms of discretionary income.”

More consumers are viewing their own financial situations with optimism, he said.

And yet there are some wild cards in the mix. As the Federal Reserve seems poised to keep boosting interest rates and as inflation continues to grow (albeit at a slowing pace), certain spending patterns bear watching that may signal some financial difficulties down the road. He pointed to recent findings from the Consumer Financial Protection Bureau (CFPB) that show that younger consumers have embraced buy now, pay later (BNPL) options, and a significant percentage of them have lower credit scores and were already carrying significant debt when they started using those payment options. Forty-two percent of consumers said they can envision taking on at least one additional credit product this year.

“These consumers are trying to live within their means, but they also have to pay more for goods and services,” said Nayar.

Roughly 46% of individuals had to grapple with an unexpected expense in the last 90 days, which indicates that there may be unforeseen pressures in the months and years ahead.

If those pressures mount, and its more than likely we’ll all encounter an unexpected financial demand, savings balances also bear watching, said Nayar.

“The [savings] cushion was high COVID-19, but now they are just declining,” he said.

Consumers with issues paying their bills are carrying debt balances that are more than 150% of their available savings. That means even if they emptied their bank accounts and paid down what they could, they’d still have some debt left to pay off. At the end of last year, PYMNTS and LendingClub found that a third of consumers were not saving any money at all, which means that balancing their finances has become, and will remain, a significant challenge. One way to help manage that debt, he said, is to transfer that credit card debt into an installment loan with a fixed payment rate and defined end date.

Looking ahead, he said that the most obvious impact from consumer prudence about their spending is that discretionary spending is going to continue to be pressured. The big-box retailers, such as Macy’s, have reported that they’re feeling the pinch. Many retailers are already planning out their inventory for the upcoming holiday shopping season — and the current macro headwinds and consumer sentiment may spur them to carry less on their (brick-and-mortar and virtual) shelves. By way of contrast, merchants such as Walmart are seeing strong demand for groceries and the other staples of everyday spending.

Thus far into 2023, a few data points do not make a trend.

“I’m optimistic that consumers are starting to adapt to these challenges,” said Nayar, “but who knows what the next nine months of the year are going to hold?”