Credit Trends: Super-Prime Consumers Tap Home Equity Lines of Credit and Credit Cards Not Available To Most
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Last month in my credit trends post, I talked about how consumer debt was shrinking, but I was waiting to see signs of “portfolio cleansing” and a rise in bank card originations. While some evidence of an economic recovery is beginning to emerge (such as delinquencies starting to go down), the credit market still hasn’t made a comeback.
Across the board, I’m seeing tighter standards from lenders-for bank cards, home equity loans, and auto loans. When business gets bad, lenders respond by tightening their belts. It’s a knee-jerk reaction in a recession, and it makes sense from a business standpoint. Lenders just aren’t willing to risk giving credit to a consumer who poses a greater risk.
The amount of new credit available today is generally lower than it was before 2007. Fewer consumers are getting new credit, but when you look at the consumers who are getting credit, they’re getting smaller loans than before.
You’ve heard about all the trouble with “subprime loans,” but now you can add another word to your vocabulary. As the housing crisis and recession continue, the only people getting home equity lines of credit and other loans are “super-prime” consumers-or those who fulfill every aspect of the tighter lending standards.
Credit Trends: Home Equity Lines of Credit vs. New Credit Cards
A few years ago, during the housing bubble, new home equity lines of credit exceeded new credit card lines of credit. But now that we’re seeing a housing correction, these numbers have reversed.
April 2006 YTD
New credit cards opened = $95 billion
New home equity lines opened = $115 billion
April 2010 YTD
New credit cards opened = $36 billion
New home equity lines opened = $22 billion
Why have new home equity lines of credit dropped so drastically? I think that home equity lines of credit were used in nontraditional ways during the housing bubble. The original intended use of a home equity line of credit was for a home remodel or home renovation. But people were taking out home equity lines of credit to start or expand small businesses or make big purchases. “Flippers” used the cash for investment properties.
The housing correction is bringing lenders and borrowers back to the traditional usage of home equity lines of credit, and that’s one of the reasons we’re seeing such lower numbers.
Credit Trends: Credit Cards
Credit card lenders have been changing their lending habits as well, shifting their business to a lower-risk population. Looking at the people who opened new credit cards in April 2008, 66 percent were considered “prime” customers. In April 2010, that number has increased to 78 percent.
I’m not looking at the total number of applicants or total number of people getting cards, but at the proportions. A shift to a larger amount of “prime” customers tells me that lenders are being more cautious about their lending strategies and choice of customers.
As I’ve said before, I think we’re not quite at a recovery point, and I’ll be keeping an eye out for credit card originations to pick up as a sign of improvement.
Credit Trends: Auto Loans
A few months ago, I talked about seeing some consumer confidence in the larger number of auto loans, but consumers are being smarter with their purchases. They’re buying $18,000 cars, rather than $50,000 cars.
I’m still seeing more auto loans, but the credit criteria have tightened, just as in the other categories. While there are more auto loans, we’re not seeing the underwriting standards change. Consumers are more careful, and lenders are staying conservative. A sign of recovery will be when these standards start to loosen.
Credit Trends: When Will We See an Economic Recovery?
In all areas, the economic recovery seems somewhat fragile, with a pervasive “not quite there” attitude holding back its pace:
Everybody is still waiting on the sidelines, but with the right growth signals, we could unleash the pent-up demand and pent-up supply, which are the ingredients needed to move the economy forward.
What are you seeing in your business and in your own home?
Keep checking back to the Equifax Personal Finance Blog for more credit trends.
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