Finance Blog
Consumers Paying Off Debt Helps Economic Recovery
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.
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.
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I have a complaint. Over a month ago I mailed in a request to remove a fraud alert from my credit report that is outdated. It is attached to a phone number I no longer have (and have not had for years). I bought a car last spring with no problem. Now I have moved into an apartment and want to set up internet service. AT & T says that Equifax is incorrectly reporting that I have a fraud alert on my credit report and cannot give me service unless it reaches me at that phone number. Well – hello? Why connect it to something temporary?! A fraud alert to establish my identity ought to have been connected to something more permanent to identify me – Last name, date of birth, mother’s maiden name anyone? This is ridiculous. This is poor quality reporting at it’s worst!!! Fraud alerts are meant to protect us – not harrass us!
@Anonymous – I’m sorry to hear you’re having problems. Your data file for utilities – a separate one from the credit file – can also have a fraud alert attached to it. Here on the blog we can’t access your specific account files, but you can follow up with Equifax via the online dispute link: https://www.ai.equifax.com/CreditInvestigation/
I was just listening to the radio and heard a commercial the suggested that the company would consolidate all your debt and negotiate a lower interest rate…so i called the # 800 715 9337- the gentleman that answered did not greet with a company name- so I asked- he said “debtwise.com” i repeated it back to him- then he asked could he help me with a debt issue- I told him not quite yet – i wanted to do some research and maybe call the BBB- the gentleman got defensive and said sure but i dont know why you wouldnt trust us. I said with the state of the world – why would you assume otherwise. he hung up on me. are you advertising on the radio/seemed fraudulent
Once a debt has been paid, how long before it falls off the credit report? It of course shows as paid but its still showing as a collection/negative account which brings down the credit score.
@Inquiring Mind – Collection accounts generally remain on your credit file for seven years from the date the account first became past due, leading to the account’s placement with a collection agency. You can find more about how long information stays on your credit report here: http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/
Thanks for reading and commenting.
Hi Inquiring mind,
As far as I know, all debts stay on your credit report for 7 years. I would like to suggest that the next time you decide to pay off a collection or even a charge-off that you send a PFD (Pay For Delete) to the company you owe the money to. Basically, what this does is negotiates with the company (before you pay it) to delete it entirely from your report once you have paid what you owe. I’ve done it a few times so I know it works.
Good luck!
@Heytonia – thanks for reading and commenting. Hope to see you back on the blog soon.
Equifax’s credit score calculation is flawed. My score is less than the maximum due to “AMOUNT OWED ON REVOLVING ACCOUNTS IS TOO HIGH”. I’ve never had any loan except my mortgage, I charge everything to my credit card, and pay the entire statement every month. I’ve done that consistently for 10 years.
Is Equifax’s calculation perhaps confused because it sees an average credit card balance of $2500? If so, it’s a flawed method. Equifax’s 1 product is credit score calculation; it needs to get this right.
I charge everything to my credit card for convenience, automatic tracking, and a free $50/mo. This in no way makes me less credible.
Person, I know what you mean by their flawed methodology. It takes equifax up to 4 months to even change balance owed on credit accounts, so you will never show as paid off unless you quit using. The 2500 should not count but a couple points against you as a percentage of your overall credit though unless you have a very low credit limit to start with.
@Person – Credit scores are calculated with a lot of different factors and can vary for each consumer based on their financial situation. Because your credit report is updated every day, your bureau score is recalculated continuously. It could change every day as credit grantors, public records, and collection agencies report data. So your credit score from a month ago is probably not the same score today. Check out some other blogs for more information about how credit scores are calculated: http://blog.equifax.com/credit/why-are-your-credit-scores-different/
Thanks for reading and commenting, and we hope to see you back on the blog again soon.
JF, I really appreciate the reply! In my case of $2500 per statement, my credit card limit is $30k, so that’s only 8.3% and I still have $27.5k credit available. But somehow that triggers the “revolving” flag. It seems it would make more sense for Equifax to instead look at the balance the user is paying interest on, which is the net amount owed beyond each statement. People who pay credit card interest are less credible; people who pay the entire balance for 10 years running aren’t
Just wondering… I’ve had the Equifax Complete product since 1/21/11. I’ve “updated” my score numerous times over those months since signing up. Sometimes 5 times in the same month as I was considering making large purchases. In the 26 times I’ve ran it my score has varied only 15 points. Most of the time it’s a 5 or 6 point variation. I ran my score on 3/4/12 and then on 3/18/12. The variation was that the 3/18 score was 3 points lower. On 3/7/12 I applied for a loan at a local lender (who only uses Equifax for credit info) and my score was 21 point’s higher than the score I got from Equifax on 3/4. How could my score vary that much in just 3 days with nothing changing in my finances?!? I believe the accuracy of the score Equifax gives you as the user of their product versus what a lender gets is very different. Needless to say I canceled my subscription and attempted to get a refund of a portion of the monthly fees I was charged to no avail. I stongly advise anyone who is considering using Equifax’s products to reconsider based on the apparent disparity of scores you get versus the ones a lender gets.
@Anonymous – Credit scores can vary over the course of the month based on your balances and available credit. It could change every day as credit grantors, public records, and collection agencies report data.
Check out this blog on why your lender’s score might be different from your Equifax credit score: http://blog.equifax.com/credit/why-is-the-credit-score-my-lender-calculated-different-from-my-equifax-score/
Thanks for reading, and we hope to see you on the blog again soon.