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We’re well into the new year and I’ve almost stopped writing 2011 on my checks, but people are still asking what’s happening with the economy and when we are going to be out of the recession. I’d like to take a look U.S. consumer credit data to benchmark where the economy is (as of the end of 2011) versus pre-recession (2006). It’s important to take note of how consumers might pay off debt, how they’re applying for credit, and how they’re making payments.
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 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.
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