The Average Credit Scores in the U.S. Hit a High Record since the Recession

04.18.18
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Business /18 Apr 2018
04.18.18

The Average Credit Scores in the U.S. Hit a High Record since the Recession

The credit scores for American consumers has attained a record high and at the same time, the number of individuals considered to be risky borrowers has shrunk to post a record low. As far as the economy and lending industry are concerned, this is definitely a huge boon. The population’s fortunes have constantly improved in the midst of dropping unemployment and a constant economic growth.

With almost ten years since the last recession, most Americans have shaken off the bankruptcies and foreclosures that plagued their credit reports for years. In addition, about six million people will wipe bankruptcies off their financial profiles in five years’ time. This will help in raising the credit scores and ensuring that consumers have access to affordable loans. Basically, most financial providers are keen on the credit reports during loan approval process as well as determining the cost of the loan to clients.

Becoming great again

Negative remarks on credit scores are dwindling and this means that most people have clean records with the credit bureau. In April, the wall street journal announced that current credit scores for the average American consumer stood at 700 points. This score is the highest ever recorded since the FICO credit scores firm began its quest of gathering and storing the data in 2005.

On the flipside, the number of people with an average score that is less than 600 took a nose dive to stand at 20% of the population with credit score data. This is a great improvement considering that this average score was once recorded to be 25.5% sometimes in 2010.

It is worth noting that credit card borrowing has experienced a significant increase. In addition, the trend with credit scores means that more people are set to become eligible for various personal loan products. As a result, there will be an increased level of consumer spending which is bound to cause a significant ripple in the economy.

Red-pilled economists are getting skeptical

The announcement that more than six million people will have clean financial profiles within the next five years has raised serious concerns among a faction of economists. Basically, these people will be cleared to utilize credit again. Remember they are spending cash they are yet to earn.

According to some economists, these are systems that only end up creating bigger debts and as a consequence, raising a volatile bubble that can burst at any time. If this happens, the government will have to move in to save the situation meaning the taxpayer will have a heavier burden to bear.

There is no denying that debt is quite useful when used in the right manner. But when in the hands of unseasoned users, trouble and financial hardships are a high likelihood. Nevertheless, there are specific situations and times when credit is not only necessary but also very useful.

With the level of debts indicating a continuous rising trend, you can easily conclude that Americans didn’t take enough lessons from the financial meltdown that took place in the last decade.

The household debt is raising eyebrows

Even in the midst of the improved credit scores, rising household debt is one specific feature of the current economy that is posing serious concerns whether more money should be offered to consumers. During the first quarter of 2017, the level of debt surpassed the numbers posted during the previous financial meltdown.

By March 2017, the total household debt stood at $12.73 trillion. This figure is about $50 billion more than highest peak recorded in the devastating 2008 economic recession. Nevertheless, high ranking officials from FED are quick to indicate that although this is a record high, it shouldn’t be a cause for alarm.

Financial experts continue to firmly say point out that new debt peaks shouldn’t be celebrated just as they shouldn’t scare anyone. In contrast, this should be used as a pivotal insight to assess the overall debt performance. Basically, the occurrence of delinquent accounts has shown a significant improvement and remained within the safe levels but there have also been incidents where divergent trends appeared on various types of debts.

The debt dilemma could be shifting

Previously, people who were directly affected by the financial crash were quite reluctant to utilize personal credit products. As a coping mechanism, debt elimination became a priority as they watch to see if the economy will recover and this facilitated the growth of savings.

In general, the rate of savings attained peak levels during the recession periods as well as immediately after the crash. The current figures show that level of disposable savings for Americans has surpassed the highest peak attained prior to the recession.

When compared to the previous years, the rate of default among Americans seems to dwindle. Both consumer and mortgage debt records are showing that most people are quite effective in managing their debts. As per the Experian default reports, first-mortgage default rates was recorded to be 0.69%. When compared to the historic high of 5.67% which happened just after the recession, the current figure is about 8 times lower.

In the light of the increasing prices of homes, some economists pose questions as to whether they could be a precedent for a brand new bubble. However, experts with sufficient knowledge in real estate are quick to indicate that market conditions in the mortgage industry show no sign of looming doom.

What if other forms of consumer debt are sending a message?

While some types of debt show a good performance, there are others that are a subject for complex debates among the financial circles. Technically, other forms of consumer credit could be silently weighing down this economy and limit the portion of disposable income available for Americans. If this is the case, there is a likelihood of multiple defaults if there is a significant decline in economic conditions. For instance, Americans owe around $1.4 trillion in student debts alone which is the highest figure ever recorded in history. At the same time, debts accrued from auto loan financing stand at a whopping $1.1 trillion.

When you compare the current situation with what was on the ground a decade ago, the debt portfolio is significantly different. Basically, it’s dominated by student loans, car loans, and credit cards while mortgage debt has subsided.

As the auto and college tuition debts continue to rise, the associated interest rates are getting higher. This introduces the question of whether this trend is overstretching the resources available to consumers choking some subsectors where consumers could be allocating the money as they did in the last few years. This isn’t a healthy scenario for the economy. Basically, if consumers are not spending there is a significant restriction in the rate of economic growth.

Final words

One of the main benefits of credit score monitoring is the deliberate fostering of healthy borrowing as well as expenditure habits. While the rising scores elicit confidence in the financial sector, the increased consumer sentiment has been quite instrumental in promoting economic growth due to the increased expenditure. Nevertheless, the rising household debt is raising concerns considering that there have been tons of credit card delinquencies over the last few years.

With the economy growing at a steady rate and the level of unemployment getting lower, there is a high likelihood that conditions will get better. But this argument will only hold water if the trends indicated by the various items on current debt portfolios are not harboring a nasty surprise. In any way, this is something that’s worth constant monitoring.

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