Credit Trends: Signs of Life in the Credit Universe
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The economic recovery has been slower and weaker than expected. Part of this is the nature of the recession and its manifestations. The healing process is progressing as a series of small, incremental improvements—baby steps.
There are signs of life in the credit universe, and here is what we are seeing in Equifax’s latest Credit Trends data: Risk scores are stabilizing and improving as fewer consumers are delinquent. More consumers are paying down debt voluntarily, and lenders are cautiously extending new credit.
Auto Loans Continue to Drive Credit Market
New auto loans continue to increase in 2010. There were 855,000 more auto loans in June year-to-date, for a total of $8.4 million in auto loans. Higher auto loan amounts suggest additional market “normalization.” Tighter auto lending standards have not eased but are likely to this year.
Credit Cards Show New Signs of Life
The number of new credit cards increased in June 2010 year-over-year for the first time since 2007. June 2010 saw new general-purpose cards with balances of $2.6 million—75,000 more new cards than in June 2009.
As part of the growth, card lenders loosened lending requirements to accommodate a larger portion of subprime or higher-risk consumers. Although new cards in 2010 may not top 2009 numbers ($32 million in general-purpose cards and $34.3 million in private-label cards), card lenders are starting to open new card offers to a broader risk spectrum of consumers.
Why Does New Credit Help the Economy?
New credit facilitates growth in balances or “outstandings,” the backbone of certain types of consumer spending—autos, homes, computers, furniture, vacations, etc.
Recessions typically result in more balances being written off due to nonpayment. Unique to this recession, consumer caution led to consumers paying down debts or paying debts off. As a result, consumer debt today is lower by more than $800 billion from the October 2008 peak—almost two years of balance declines.
Tracking year-over-year balance changes, I see the rate of decline is slowing by varying degrees. So I am starting to look for bottoms—and then growth. Credit expansion is often tied to economic expansion.
Finally, nonpayment rates are (somewhat) moving to the background. The number of consumers missing one or two payments has decreased for several months, and this pattern is cycling through to consumers who miss more than two payments and consumers who stop paying altogether. This is for the major loan types—auto, home equity, and card.
Very recently, the number of consumers missing more than two mortgage payments has begun to decline, resulting in the mortgage delinquency rate declining for the first time in June 2010 year-over-year.
How Is Your Credit Contributing to the Economy?
One of the keys to getting out of the recession is credit growth. How are you contributing to the credit market?
Are you spending more today?
Where are you willing to spend?
Where are you not willing to spend?
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