Credit scores for U.S. consumers reached a record high this spring while the share of Americans deemed to be some of the riskiest borrowers hit a record low -- a potential boon for lending and economic activity.
Consumers' improving fortunes reflect falling unemployment and continued, if lackluster, economic growth. An added benefit: The passage of time since the recession and housing meltdown are helping household balance sheets.
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In ever-growing numbers, the worst personal financial setbacks, namely foreclosures and bankruptcies, are falling off Americans' credit reports. More than six million U.S. adults will have personal bankruptcies disappear over the next five years, according to a recent Barclays PLC report.
Wiping away such negative events also helps boost consumers' credit scores. Lenders rely on both the reports and scores when determining whether to approve consumers for loans and at what interest rates.
"Higher scores lead to more available credit," said Cris deRitis, senior director in the economics group at Moody's Analytics. "We'd see more activity in terms of loan approvals and credit-card approvals, more spending and that would have a ripple effect across the economy, increasing aggregate demand for goods and services."
The average credit score nationwide hit 700 in April, up one point from last fall, according to new data from Fair Isaac Corp. That is the highest since at least 2005. That was the year Fair Isaac, the creator of widely used FICO credit scores that range from 300 to 850, began tracking the data.
Meanwhile, the share of consumers deemed to be riskiest, with a score below 600, hit a new low of roughly 40 million, or 20% of U.S. adults who have FICO scores, according to Fair Isaac. That is down from 20.5% in October and a peak of 25.5% in 2010.
As credit scores rise, banks and other lenders are likely to make credit more widely available to consumers, and at cheaper cost.
"The domino effect for lenders would be more consumers they can market to [and] more consumers who may be credit-eligible who weren't in last year's models," said Nidhi Verma, senior director of research and consulting at credit-reporting firm TransUnion.
In the wake of the downturn, financing didn't disappear completely for consumers with bankruptcies or foreclosures on their credit reports. But it became harder for them to get, as many lenders were lending only to consumers with pristine credit histories.
With many lenders, that risk aversion extended to credit cards and auto loans. As a result, some consumers with black marks on their reports turned to cash for most expenses and held back on big-ticket purchases.
Laura Paolinelli of Round Hill, Va., filed for bankruptcy in 2012 after she stopped paying her mortgage, she says. When she applied for an Amazon.com Inc. credit card late last year, Ms. Paolinelli, an auditor at a research firm, says she was rejected.
In February, the defaulted mortgage and bankruptcy were again an issue when she applied for an auto loan: A loan officer told her she would have a better shot at getting a lower interest rate if her husband also signed as a borrower, she says.
"I'm looking forward to that not to show up anymore," Ms. Paolinelli said. The foreclosure and bankruptcy occurred after she failed to sell her home, which had fallen by more than $200,000 in value, she said. "It's a little embarrassing when they run your credit and you know they're going to see that because it always comes up....It was once in my life."
Mortgage foreclosures stay on credit reports for up to seven years dating back to the missed payment that resulted in the foreclosure. Foreclosure starts, the first stage in the process, peaked in 2009 at 2.1 million, according to Attom Data Solutions. They totaled nearly 1.8 million in 2010 and remained above one million during each of the next two years.
Personal bankruptcies are more complicated and can stay on credit reports for seven to 10 years.
Consumers who filed in 2007 for Chapter 7 protection -- the most common type of bankruptcy, in which certain debts are discharged and creditors can get paid back from sales of consumers' assets -- are now starting to see those events fall off their reports.
Some 500,000 Chapter 7 bankruptcy cases were filed in 2007, a figure that swelled to nearly 1.1 million in 2010, according to the Administrative Office of the U.S. Courts.
Chapter 13 bankruptcies, in which consumers enter a payment plan with creditors, usually stay on reports for at least seven years. Those filings reached a recent peak of nearly 435,000 in 2010 and are set to start falling off reports this year.
Fresh starts for credit reports are likely to help boost originations of large-dollar loans for cars and homes. Consumers have a greater chance of getting approved for financing if they apply for loans after negative events fall off their reports, in particular from large banks that have stuck to strict underwriting criteria, says Morgan Whitacre, who oversees consumer-loan underwriting at Bank of America Corp.
Credit-card lending, already on the rise, could increase further as a result of fresh starts. Consumers who have one type of bankruptcy filing removed from their credit reports on average experience a roughly $1,500 increase in spending limits and rack up $800 more in credit-card debt within three years, according to the Federal Reserve Bank of New York.
Geoffrey Page, of Rockford, Ill., is a potential beneficiary. The 59-year-old has nine months to go until his financial knocks from the downturn are wiped away.
Mr. Page filed for bankruptcy in 2008 after his house went into foreclosure. He has lived off cash since then, and says he has been rejected for a student loan for his son and for a car loan.
Already, though, he has a taste of what things could be like after the bankruptcy is cleared. Mr. Page, a quality coordinator at a hospital, says after the mortgage default fell off his credit reports, he began receiving more credit-card and personal-loan solicitations.
Mr. Page has been renting since he filed for bankruptcy. When that falls off his credit reports as expected next year, he says he will likely look to buy a house.
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(END) Dow Jones Newswires
May 30, 2017 02:47 ET (06:47 GMT)
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