Increased demand, increased write-offs

With the growing demand for student loans—currently at its highest level since 2006—and only a modest employment recovery, student loan write-offs have been increasing. Banks wrote off $17.4 billion in student loan debt in 2012, a record for the seven years tracked, according to a recent Equifax Credit Trends report. In addition, $5 billion in student loan debt was written off for the first three months of 2013, an increase of more than 45 percent from the prior year.

Outstanding loans and balances on the rise

The weak labor market and limited employment options for college graduates may also be contributing to a steady rise in student loan delinquencies and defaults. Outstanding balances on student loans, for example, increased by more than 16 percent from March 2012 to March 2013—from $748.6 billion to $896.9 billion. The number of outstanding student loans increased by almost 17 percent—from 107 million to 126 million.

Rising credit limits, new loan originations

While 2012 saw an increase in origination credit limits across six different loan types, the most substantial increase was for student loans—the student loan credit limit was at $88.5 billion in 2012, about a 24 percent increase from the $71.5 billion in 2011. Additionally, there were 18.6 million student loan originations in 2012, which was a 14 percent increase from the 16.3 million in 2011.

Because the college price tag is increasing faster than the rate of inflation, student loan debt is expected to grow. Therefore, it’s important that you consider how you are going to pay back debt once you receive your diploma.

All statistics from the Equifax U.S. Consumer Information Solutions: U.S. Consumer Origination Trends and U.S. Consumer Information Solutions: U.S. Consumer Credit Trends reports, released March 15, 2013.

Janet Dedrick is a strategic consultant with the Equifax Analytical Center of Excellence. Janet covers US consumer credit trends reporting and analysis in addition to supporting Equifax client analytical initiatives. Prior to Equifax, Janet worked in the financial services industry in various roles, including risk management and banking regulatory policy areas. Janet holds an MBA from the University of Chicago.

Not including mortgages, loan originations increased from $659 billion in 2011 to $750 billion in 2012, according to a recent Equifax Credit Trends report. However, loan originations are still down from their pre-recession peak in 2006 by more than $400 billion. These dollar amounts highlight the idea that we are on the road to recovery—but that there is yet more road to travel.

There are many explanations for this—fewer people were taking out home loans because they lost equity or were underwater in their homes, more people put off purchasing new vehicles because they were worried about the economy, and so on—but the drop in loan originations generally is tied to economic factors. With the economy diving into recession, many people suddenly found themselves unemployed or income-insecure. They were worried they would lose their jobs, or they were facing furloughs or cutbacks in both hours and benefits.

Since the recession, which lasted about from December 2007 through June 2009, lending has increased, starting in 2010. Post-recession, auto loans have increased the most, but credit cards have also seen gains over the past year.

For the housing market, loan origination is still quite low. It’s growing, but at a very slow pace, largely due to the tough standards banks and other lenders have instituted since the recession took hold.

Many of the causes behind the recession, particularly in the housing sector (which constitutes about three-fourths of consumer debt), involved people taking on more debt than they could reasonably afford. As a result, lenders got strict about to whom they would lend—a trend that likely will not change in the near future, regardless of what kind of economic recovery we see.

Still, first mortgage originations have been increasing, thanks in part to people hoping to take advantage of low interest rates. By mid-2012, about 4.25 million first-mortgage starts were on the books, compared to about 2.5 million at the same time in 2011.

The strict underwriting standards are affecting who qualifies for those loans: About 80 percent of recent mortgage originations are comprised of prime risk consumers—those who carry little lending risk and therefore have credit scores of at least 700. By comparison, in 2006, only about half of first mortgages were taken out by those with credit scores above 700.

2012 was also the first year that home equity revolving lines increased, tracking alongside reports that home prices have increased over the last year. While this is good news on the home market front, it’s worth pointing out that the $65.5 billion in loans taken out in 2012 is a mere fraction of the $295.2 billion taken out in 2006.
Despite the increases in the number of mortgages, the amount of mortgage debt Americans are carrying as a whole has steadily decreased since its peak near the end of 2008, when Americans had $9.8 trillion in mortgage and home equity debt. That number is down by 14 percent to $8.4 trillion, due largely to foreclosures and in part to Americans paying down mortgage debt at a faster pace than they are taking it out.

Consumer debt, which does not include mortgage debt, has actually seen the opposite trend. It has been trending upward since 2010, reaching $2.51 trillion at the end of December 2012 (still down from the $2.57 trillion high in 2008).

It’s clear that consumers have been more willing to borrow money recently, but the mortgage market still lags behind the rest of the country’s recovery. Lenders are also more willing to offer loans, but they continue to have tough standards when it comes to mortgages.

If you live in Vermont or North Dakota, you’ll need a high credit score to keep up with your neighbors. These states are tied with the highest average score of 721—a score that is equated with some of the least-risky borrowers.

According to Equifax Credit Trends data, the rest of the states with the top ten average credit scores are varied and include Midwestern states Wisconsin, Minnesota, and Nebraska; Western states Montana and South Dakota; Northeastern states Massachusetts and Connecticut; and America’s only island state, Hawaii.

On the flip side, if you live in the South, chances are you’re living in one of the states with the lowest credit scores, bottoming out in Mississippi with an average score of 661. The rest of the states with the bottom ten average credit scores are in the South as well, with the exception of both Oklahoma and Nevada.

While there’s a 60-point difference between the lowest and highest average credit scores, both numbers typically qualify as prime scores—although 720 is much more attractive to a lender than 660.

These numbers are also always in flux. The U.S. is no longer in a recession, and in the past four years, credit scores have inched upward overall by a little more than four points. Of all the states, Texas saw the largest increase in its average credit score, from about 667 to 674, followed by South Dakota and Connecticut, which each had similar seven-point gains.
But the place in the U.S. with the largest increase isn’t a state at all: Puerto Rico saw a more than 13-point difference from what was previously one of the lowest scores—658—up to 671.

Almost all of the states show increases in scores ranging from about one to seven points. New Jersey was the only state where credit scores dropped over the past four years—but just by 0.18 of a point.

Find out where your state ranks among the nation, and then find out where you fall in your state by checking your own credit score.

Vermont 721
North Dakota 721
Wisconsin 720
Minnesota 720
South Dakota 718
Hawaii 718
Nebraska 717
New Hampshire 715
Montana 715
Massachusetts 714
Iowa 714
Connecticut 713
Washington 713
Colorado 713
Maine 712
Wyoming 711
Utah 710
Oregon 709
Pennsylvania 709
Kansas 708
New Jersey 708
Idaho 705
Alaska 705
New York 704
Rhode Island 704
Illinois 703
California 701
Virginia 701
Ohio 699
Michigan 697
Indiana 697
Missouri 696
Maryland 696
United States 696
Delaware 694
Arizona 691
District Of Columbia 689
West Virginia 689
Kentucky 688
North Carolina 685
New Mexico 683
Arkansas 683
Florida 683
Tennessee 682
Oklahoma 681
Nevada 677
Alabama 675
Texas 674
Puerto Rico 671
South Carolina 671
Louisiana 669
Georgia 667
Mississippi 661

Home equity revolving lines of credit work in a similar manner to credit cards. Lenders set a credit limit, and homeowners can borrow what they want when they want it—but they are borrowing against the equity available in their home. As homeowners repay the loan, they replenish the amount of cash available in the line of credit.

The number of new revolving home equity lines of credit opened between January 2012 and July 2012—the most recent date this data was available—stood at 495,000, a three-year high. However, that number is more than 76 percent lower than the seven-year high of more than two million new lines of credit opened between January 2006 and July 2006. And after peaking at $680 billion in May 2009, these credit lines fell 20 percent to a total of $553 billion in July 2012.

“Increasing new home equity revolving credit indicates homeowner confidence and momentum towards an improved market,” said Craig Crabtree, senior vice president and general manager of Equifax Mortgage Services. “While the levels are significantly lower when compared to pre-recession peaks, the recent stability has given way to consistent growth. Total first mortgages are still contracting; however, the decreasing debt and delinquencies are positive signs of a stable foundation towards recovery.”
Since mid-year 2007, usage of these lines of credit has increased for those who already had them available. In 2007, homeowners were using a little less than 48 percent of their available credit, which has since increased to around 55 percent in 2012—nearly a $200 billion difference.

But even that number has been declining since its peak in early 2011, meaning that homeowners have begun to pay off some of the credit they owe, releasing some of their available credit. That’s a good thing for pinched homeowners, as credit availability is one of the factors involved in calculating a credit score.

First mortgage delinquency rates

First mortgage delinquency rates saw the greatest leaps—from 5 percent in 2007 until their spike in 2010 at a little more than 12 percent. Since then, the rate has slowly declined, now hovering at around 8 percent of total first mortgage loans, though it still remains elevated over pre-recession figures. Additionally, first mortgage 30-day plus delinquency rates declined 16 percent from the end of the third quarter 2011 to the same period in 2012.

Home finance and home equity revolving lines of credit

Along with first mortgage rates, delinquency rates for home finance and home equity revolving lines of credit have also dropped, but they remain higher than their pre-recession rates. Home equity revolving 30-day plus delinquency rates declined 13 percent over last year, while home finance delinquency rates dropped 15 percent.

Some of this decrease could be credited to consumers refinancing existing mortgage debt at lower rates, along with the overall decline in mortgage debt due to foreclosures, homeowners paying down debt faster through cash-in financing, or consumers shortening their mortgage terms and paying more each month.

Other declines in delinquency rates: Credit cards, auto loans, and more

Consumer finance, bank, and retail credit card delinquency rates of 60 days or more declined as well. Delinquencies in consumer finance, primarily with unsecured lines or loans, have dropped 15 percent, bank credit card delinquency rates have dropped 20 percent, and retail card delinquency rates have decreased 13 percent. Nationwide credit card delinquency rates are actually lower than pre-recession levels.

Meanwhile auto loan delinquency rates have also declined 20 percent and have landed at below pre-recession levels.

Both credit card delinquency and auto loan delinquency rates hovered at around 5 percent pre-recession and have landed at about 3 percent at third quarter’s end, indicating a consumer improvement in credit management.

What’s going on with student loan debts?

Consumer cautiousness, described by Equifax Personal Solutions President Trey Loughran as the “disciplined consumer,” has not extended to the student loan world. Recent graduates may have been struggling to find jobs with an income level high enough to help with paying off their debt.

• Student loan 60-day delinquency rates increased more than 16 percent year-to-year in the third quarter.
• Student loan balances increased year over year by $61 billion to $808 billion total.
• Student loan debt has grown from $400 billion in mid-2007 to $800 billion by the end of September 2012.
• The number of loans in that same period increased from 50 million to 120 million.

Additionally, there has not been the same push for tighter underwriting standards or guidelines to ensure a loan is safe and secure as there has been with other loans since the start of the recession. Also, unlike with mortgages or credit card debt, which can be wiped out through foreclosure or bankruptcy, student debt must be repaid. With the price of college increasing faster than rate of inflation, student loan debt will likely continue to grow.

As it turns out, not much. While individual credit scores may have seen significant changes, the median credit score has not significantly shifted.

The median Equifax credit score in 2012 hovers around 697, largely in line with the median credit score in late 2007. Over the past five years, the median score has shifted up by only six points in a range from 280 to 850. That’s not even a 1 percent change, despite the economic turmoil that hit Americans through the recession.

How did credit scores remain so steady?

Credit stores have remained steady as a matter of balance. The highest-risk population—people carrying credit scores ranging from the bottom to 579—did increase over the course of the recession. This is the portion of the population that could not or did not make payments because of unemployment or debt stress like foreclosures.
The highest-risk population grew from 17.5 percent of the total number of borrowers to a 19 percent high in 2010. But these numbers have dropped since 2010 to 16 percent, representing an overall drop in the high-risk population over the past five years.

Meanwhile, the number of lower-risk consumers—those with credit scores ranging from 740 to 850—remained relatively steady, increasing by between 0.5 percent and 1 percent over the last five years. But lower-risk consumers make up a bigger piece of the pie—about 43 percent of the total number of people Equifax serves.

This larger population outweighed the lower-risk population, thus causing the six-point score increase to the median credit score.

Overall consumer confidence in the economy has been shaky at best over the past five years. The idea, then, is that many people have been spending less, paying off debt regularly, and taking out less credit. Lenders are also issuing less credit, and potential borrowers have to meet tougher lending standards.

The numbers support this idea. Credit originations have contracted—both consumers and lenders have taken out less credit in the past five years, and overall debt has decreased by nearly 12 percent, or $1.5 trillion, since October 2008.

There is one sector of the economy where lending has actually increased: the auto industry. Auto loans have increased 5.4 percent since 2010.

The data released this summer indicates some hopeful signs—higher median credit scores and a recent decrease in high-risk credit scores—but there’s still a long way to go before we fully recover.

Here’s a refresher on a credit score’s components:

1. Payment history. Do you make your payments on time or are you late? If you’re late, how late are those payments? Are you paying in full or only making minimum payments? The answers to these questions will be reflected in your credit score.
2. Amounts owed and available credit balances. Creditors look at how much installment and revolving debt you owe. They also want to know what percentage of your available credit balance you are using.
3. Length of credit history. How long have your credit accounts been open? Which accounts have been closed and why? These answers will also be factored into your credit score.
4. New credit accounts. Opening several new accounts can affect the length of your credit history and your available balances, and doing so may negatively impact your credit score.
5. Types of credit. Creditors like to see a variety of types of credit, including installment loans (such as auto loans), revolving loans (such as a mortgage or home equity loan), and open credit accounts (such as credit cards).

The credit scores of older consumers vs. younger consumers

As you keep these components in mind, it will become apparent that older people are more likely to have a longer credit history upon which to build a score. If you’re younger, it doesn’t mean you will have a low score, but you might have less information on which to base your score.

• Older consumers, especially retirees, have an established credit history—the what, how long, and how much of a credit score. These are consumers who may have paid off mortgages and car loans, and they probably are able to handle some credit card debt. Their budget and spending habits may not include a mortgage or car loans.
• Younger consumers are just starting their financial life. They’re taking out their first loans and establishing their first credit accounts. They have a shorter payment history. Younger consumers, as a group, tend to have lower credit scores because they have less information available for calculation. They’re trying to build a credit history, but lower incomes sometimes cap payment abilities. That can translate into late payments and a harder time handling debt.  Younger consumers are also more likely to be victims of fraud. They may not know how to protect against identity theft and how to guard their personal information. These consumer fraud issues can be hard to overcome for someone just entering into the financial world.

The bottom line is that age is not directly calculated into your credit score, but it can play a factor in some of your score’s components. The best thing anyone, young or old, can do for a credit score is to be responsible with taking out credit and to make all payments on time.

Credit scores

Today’s average credit scores and bankruptcy risk scores are better than pre-recession scores were. Large groups of consumers are better off after surviving the recession. They are still employed, they spent cautiously, and they managed debt levels. Now they’re in a better position with their credit report to take out credit and contribute to the economy by buying consumer goods or even a new car.

As we continue to move past the recession, we can look at the data to help answer the question: Are credit score improvements due to lender requirements tightening or to consumers exercising more caution in their financial transactions?

New credit

New credit is still far below pre-recession levels. New credit dollars (credit and loans, excluding home equity and mortgage loans) in 2011 were a little more than half what they were in 2006.

However, since 2010 we’ve seen growth in new credit, with new auto loans standing out as healing the fastest. Overall, credit lenders have been more cautious with tighter lending requirements, but low-risk borrowers (720 credit score or above) are taking out auto loans at pre-recession levels. New auto loans (as of Oct 2011 YTD) were at 76 percent of pre-recession levels, and new auto bank loans are almost completely recovered at 97 percent of pre-recession levels.

Consumer debt repayment

We’ve now moved past the highest levels of missed payments and late payments. Early-stage delinquency (defined as 30 days past due or one missed payment) is down and levels are even better than they were pre-recession.

This improvement is largely due to who received loans from lenders during and after the recession. Lower-risk consumers mean better loan performance. Consumers with higher credit scores pay their bills, and lenders are more likely to continue to take on risk and give credit and loans.

Auto loans for 2011 ($19.8 billion) were below 2006 levels ($20.9 billion). In addition, credit card losses have almost recovered, but they’re still not quite there— they were 13 percent higher in 2011 than 2006.

Outstanding credit balances

One side effect of the recession is that credit balances have been declining over the last three years. We usually see credit balances increase year over year, but credit balances are below pre-recession levels—$11.1 trillion in December 2011 versus $11.3 billion in December 2006.

Unfortunately, the decline in balances is partly due to consumers who couldn’t pay their bills or simply didn’t think certain bills were worth paying (i.e., by walking away from a mortgage). Keep in mind other consumers have remained in good credit standing as they paid down or paid off balances. Still, the decline is slowing because new credit is continuing to grow and non-payment rates are declining.

I continue to look toward the increase in auto loans and new credit cards as signs of life. However, for 2012, my eye will be on when we might see a bottom to the problems in home finance.

How seasonal shoppers affect the credit card market

Credit card balances tend to fluctuate throughout the year according to seasonal spending habits like Black Friday and Christmas shopping sprees. Some people save their credit cards specifically for end-of-the-year shopping and may instead stick to cash for the other nine months of the year.

With these seasonal shoppers added to the credit card market, the total balance on credit cards increases, but the average balance doesn’t increase. The seasonal shoppers’ balances are likely not as high as the regular credit card users’ balances. Seasonal shoppers aren’t putting all of their everyday purchases on a credit card—it’s probably just their holiday shopping purchases that make up their balances.

The current trends in credit card balances

However, as we’ve talked about before, consumers overall are deleveraging, or paying off debt. Total holiday season balances are lower now than they have been in the past few years. In 2011, credit card balances have been lower than in the last few years, and this year looks to be the bottom. I predict shopping is going to pick back up in the next few years.

I also think we probably won’t see 2011 holiday shopping credit card balances reach the level of 2010 holiday shopping balances, but 2011 overall balances are trending toward last year’s levels. I’ll reserve judgment until the end of the year, but I hope this is a sign the credit card market is bouncing back.

For those of you who do have plans to do a bit of holiday shopping on your credit cards, check out strategies for paying off debt as shared by Mechel Glass from CredAbility.org.

What are your holiday shopping plans? Do you use a credit card for your holiday purchases? Do you pay the balance off right away, or pay it off over time? I try to write out a shopping list and a budget, and stick to it, for my holiday purchases. I’d love to hear your holiday shopping suggestions in the comments.

During the credit crisis, credit card companies tightened their regulations and had very strict guidelines about who could and could not open new credit. However, in 2010, one of the credit trends we saw was credit card companies easing their tighter card underwriting, and this has been continuing into 2011.

With credit card companies loosening their restrictions, more consumers are able to get credit and take advantage of more buying power. As our credit reporting models have shown, most consumers’ financial behaviors are linked together. Today, we’ll look more closely at credit card consumers and mortgage holders—and how the two overlap.

Credit card consumers and mortgage holders

What does holding a mortgage have to do with your credit card habits? Consumers with a mortgage are generally lower-risk customers, and credit card companies are willing to give them credit. Forty-two percent of new cards and almost 60 percent of new credit went to consumers with mortgages. On average, credit scores and available credit are higher for consumers with mortgages.

However, about half of the new credit card consumers with a mortgage have property values estimated at $200,000 or below. Thirty-five percent own a home worth between $100,000 and $200,000, and the majority of new credit card consumers have equity in their homes, contributing to their overall financial health.

Some financial markers are out of the consumer’s control. Real estate blogger Ilyce Glink has written about the housing market and how home values continue to plummet. About 35 percent of new cardholders with a mortgage are underwater on their mortgage. Even among new credit card originations for customers with a credit score above 700, 30 percent of those with a mortgage are underwater. But even with falling home values, these mortgage holders are still consumers in the credit world.

Home value and home equity are important factors because consumers with equity in their homes have a better ability to weather financial hardships like unemployment or unexpected medical expenses. However, we see no evidence of lenders using home equity estimates to regulate credit lines.

With uncertainty still present in the economy, credit card lenders are still cautious. We’ve seen new card originations in the last two years, but the credit limits are still tight. Credit lines offered when the new credit was opened were decreased dramatically across all score ranges in 2009 and remain low, but we have seen some easing in 2011.

READ MORE:
Money Management Tips: Choosing the Right Savings Account
Money Management Tips: Set Your Savings Priorities
Money Management Tips: Pay Yourself First
Pay Off Debt and Take Advantage of Low Interest Rates
Identity Theft: What To Do If Your Wallet Is Lost Or Stolen