Finance Blog
More Americans Paying Off Debt and Opening New Lines of Credit
As more people are paying off debt across the country, more of us are taking out loans than we have in recent years.
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.
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I am refinancing my home loan next week! I am reducing my interest rate from current rate of 6.125% to the new loan rate of 3.75%. I am paying all of my closing cost and escrow cost up front. My home is worth about $220,000. and my loan amount is going to be $139,000. I owe less than half on my new car and I am debt free when it comes to credit cards. My goal is to be debt free in less than two years.I wish more americans would save their money and be concerned of their credit scores.
P.S. I am proud of my credit score near 800. Our current salary is approximately $200,000.
Congratulations. You not typical however because your joint income is considerably about average and astronomically above lower middle class and persons of poverty. You have obviously enjoyed good parentage and good education and are to be lauded for your efforts. On the other hand you are mightily privileged and need not be judgemental of others. Only a handful rise above their circumstances due to their efforts and focus compared to those who are brought down by their circumstances including the very privileged who waste their privilege.
@^^^ Well said!! Some people need to be a little more humble. My applause died when Joyce felt the need to mention their salary.
wow, Well with my 70k in a single income 4 person family. I managed to get %3.375 with a 618 fico, maybe your just not a cool as you think you’re. i had exactly $250 come out of my pocket for closing. my house might be worth 160k but i financed 153k on it. Oh and by they way, My income is still too high for the statistical average. By they way, for all you who need encouragment, My credit was so bad last year i got denied for a 500 signiture loan. It can be done. Hang in there, be persistant. You all can do it.
Great article. Its good to hear that lending is increasing. Please check out my page http://www.squidoo.com/bad-credit-car-loans-seattle
What do I need to do to get my credit score up , as of the 1/1/2013 I inherited business income of 9000.00 more than I already make, how do I get the credit score company to see the extra income that i’m making to help my score? Thanks Mark
Mark, It’s great to hear that your income is increasing. That gives you a lot more financial stability and is really good news. Of course, your credit score doesn’t consider your income in its calculations. Instead, it considers factors like how much debt you have and if you make payments on-time. You can read more about how your credit score is calculated here: http://blog.equifax.com/credit/debt-reduction-why-paying-down-your-credit-card-debt-helps-your-credit-score/
If you do have debt and you want to improve your credit score, you might want to use the increased income to pay it down, but that’s up to you. You could also save the money in an emergency fund or use it towards a down payment on a house. There are quite a few options to consider, and using the money wisely could improve your finances overall.
Congratulations again on the increased income, it’s worth celebrating.
Thanks for the great article. As many Americans in credit debt it’s good to see some light at the end of a very long tunnel. Which should I do, pay off the smaller card debt first (3 total) or one medium size card first? Which plan would have the most immediate benefit on my credit score?
credit score wise, pay each one down under 50% of the balance, then work on the rest of the balance. if you want to quickly pay all them down, pay the one that has the smallest down, then apply that payment to the next smallest. Work on your credit to debit ratio first. thats the bigist. if they are all high intrest, you might look at taking out a loan, a loan at 16% is better than credit cards at 25%. and you’d be improving your score by being diverse.
My credit score has always been 720 to 756 until I started transferring balances from a home rennovation to 0% interest cards…for the obvious reason of saving money in interest. My score has dropped to 670. Everything is overpaid and on time. Word of caution to anyone trying to balance transfer. Doesn’t make sense to me and sure would like suggestions!
you increase the balance on a card probily close to the max. that will always tank your score. one they are payed down, you’ll see your score recover. anytime your balance increases significantly your credit will go down significantly. in my experience credit card companies update faster, my morgage took 6 monthes to show up on my report, my $500 home depot card was there the next day, when i paid off my car loan, it took them 2 months to say it closed. you might just need to let stuff settle down.