Overdue Utility Bills Are Indicating Imminent Credit Stress

The average overdue utility bill has ballooned from $597 to $789 in the last three years. Close to 14 million households have utility debt severe enough to go to collections.

Nationally, about 1 in 20 households is in this severe utility-debt category. Utility debt is defined as severe if it is 90 days past due. That means it is currently being sent to a collection agency. 

This year, industry experts say it will cost families an average of $976 to heat their homes during the winter season, a 7.6% jump from last year. This is a red flag to lenders. Families aren’t delinquent on something they can live without. They are delinquent on utilities such as heat, light, and gas.

These overdue balances show a deeper shift. Subprime borrowers often struggle to afford basic utilities. It is an early sign of financial problems. Utility bills are often the first payment a strapped borrower doesn’t pay. That makes them a better early-warning indicator than standard scores and models.

Utility inflation has also increased nearly three times faster than overall consumer prices during this period.

As utility costs rise, millions of American households are missing their payments.

Energy costs also climbed rapidly. Monthly household energy bills increased from $196 to $265 nationwide — a 35% jump. Over a full year, that increase adds more than $800 to the energy costs of a typical household.

In some states, the average bill exceeds $300. These increasing prices decrease breathing room for borrowers with tight budgets.

Another problem is the lack of reporting. Many utilities do not routinely report payment data. Lenders may approve loans for a borrower who, on paper, seems OK. But the borrower may already be in deep distress. Utility stress is a challenge well before a loan payment is missed.

Overdue utility balances among subprime consumers have been hit with the biggest increase. Deep-subprime households saw these balances jump from $643 to $834 in the last three years. In the first six months of the current presidential term, another 117,000 households fell into severe utility debt.

One might assume superprime households spend more on energy. But that gap has closed. In recent quarters, deep-subprime households are paying at least as much for monthly utilities as the superprimers.

Households that fall behind on utilities tend to cut payments on unsecured debt. Then they fall behind on auto loans. This creates an earlier timeline of risk for lenders.

Utility problems also escalate faster in certain regions. One in 12 households in parts of the South and Appalachia has severe utility debt. This rate is nearly double the national average of 1 in 20 households. Those areas often have many high-volume subprime lending markets. 

Subprime consumers are hit the hardest by utility debt, with some households seeing their balances leap from $643 to $834 in the last three years.

Lenders on the Atlantic coast and in parts of the Midwest face very high balances — the average late utility bill is more than $1,500. Utility collections often show up weeks before lenders see any movement in loan payment behavior. Lenders can act sooner if they watch for these indicators.

Minority communities are the most affected. Black and Asian consumers now carry some of the highest average overdue balances — approaching $900. About 10.8% of Black households have overdue utility balances, compared with 3.6% of white households.

These households face higher energy burdens as well as tougher collection practices.

Lenders benefit when they see household stress early. Increased utility debt is precisely that type of indicator. Borrowers who fall behind on utilities often turn to credit cards and small personal loans. That behavior only hides the stress for a short time.

Lenders can watch for the early warning signs. Those include skipped payments, sudden slowdowns, and disruptions in automatic payments. Lenders who operate in high-cost states should watch these patterns closely.

Lenders may want to use cash-flow signals. Real-time cash flows will often show budget strains before traditional credit files do so.

Lenders can treat sudden utility strain like they treat increasing DTI and credit-card utilization. It shows fixed costs increasing faster than income. This usually appears right before late payments.

Increasing utility costs are a sharp early-warning signal for subprime lenders. Borrowers who struggle with heat and electricity often have problems with other bills soon after. Much of this strain is hidden until families are in crisis. Utility stress may be the best indicator of budget pressure. Subprime lenders can watch for this sign now.