By AnnaMaria Andriotis
Credit scores for U.S. consumers reached a record high this
spring while the share of Americans deemed to be some of the
riskiest borrowers hit a record low -- a potential boon for lending
and economic activity.
Consumers' improving fortunes reflect falling unemployment and
continued, if lackluster, economic growth. An added benefit: The
passage of time since the recession and housing meltdown are
helping household balance sheets.
In ever-growing numbers, the worst personal financial setbacks,
namely foreclosures and bankruptcies, are falling off Americans'
credit reports. More than six million U.S. adults will have
personal bankruptcies disappear over the next five years, according
to a recent Barclays PLC report.
Wiping away such negative events also helps boost consumers'
credit scores. Lenders rely on both the reports and scores when
determining whether to approve consumers for loans and at what
interest rates.
"Higher scores lead to more available credit," said Cris
deRitis, senior director in the economics group at Moody's
Analytics. "We'd see more activity in terms of loan approvals and
credit-card approvals, more spending and that would have a ripple
effect across the economy, increasing aggregate demand for goods
and services."
The average credit score nationwide hit 700 in April, up one
point from last fall, according to new data from Fair Isaac Corp.
That is the highest since at least 2005. That was the year Fair
Isaac, the creator of widely used FICO credit scores that range
from 300 to 850, began tracking the data.
Meanwhile, the share of consumers deemed to be riskiest, with a
score below 600, hit a new low of roughly 40 million, or 20% of
U.S. adults who have FICO scores, according to Fair Isaac. That is
down from 20.5% in October and a peak of 25.5% in 2010.
As credit scores rise, banks and other lenders are likely to
make credit more widely available to consumers, and at cheaper
cost.
"The domino effect for lenders would be more consumers they can
market to [and] more consumers who may be credit-eligible who
weren't in last year's models," said Nidhi Verma, senior director
of research and consulting at credit-reporting firm TransUnion.
In the wake of the downturn, financing didn't disappear
completely for consumers with bankruptcies or foreclosures on their
credit reports. But it became harder for them to get, as many
lenders were lending only to consumers with pristine credit
histories.
With many lenders, that risk aversion extended to credit cards
and auto loans. As a result, some consumers with black marks on
their reports turned to cash for most expenses and held back on
big-ticket purchases.
Laura Paolinelli of Round Hill, Va., filed for bankruptcy in
2012 after she stopped paying her mortgage. When she applied for an
Amazon credit card late last year, Ms. Paolinelli, an auditor at a
research firm, says she was rejected. In February, the defaulted
mortgage and bankruptcy were again an issue when she applied for an
auto loan: A loan officer told her she would have a better shot at
getting a lower interest rate if her husband also signed as a
borrower.
"I'm looking forward to that not to show up anymore," Ms.
Paolinelli said. The foreclosure and bankruptcy occurred after she
failed to sell her home, which had fallen by more than $200,000 in
value, she said. "It's a little embarrassing when they run your
credit and you know they're going to see that because it always
comes up....It was once in my life."
Fresh starts for credit reports are likely to help boost
originations of large-dollar loans for cars and homes. Consumers
have a greater chance of getting approved for financing if they
apply for loans after negative events fall off their reports, in
particular from large banks that have stuck to strict underwriting
criteria, says Morgan Whitacre, who oversees consumer-loan
underwriting at Bank of America Corp.
Credit-card lending, already on the rise, could increase further
as a result of fresh starts. Consumers who have one type of
bankruptcy filing removed from their credit report experience a
roughly $1,500 increase in spending limits and rack up $800 more in
credit-card debt within three years, according to the Federal
Reserve Bank of New York.
Geoffrey Page, of Rockford, Ill., is a potential beneficiary.
The 59-year-old has nine months to go until his financial knocks
from the downturn are wiped away.
Mr. Page filed for bankruptcy in 2008 after his house went into
foreclosure. He has lived off cash since then, and has been
rejected for a student loan for his son and for a car loan.
Already, though, he has a taste of what things could be like
after the bankruptcy is cleared. Mr. Page, a quality coordinator at
a hospital, says after the mortgage default fell off his credit
reports, he began receiving more credit-card and personal-loan
solicitations.
Mr. Page has been renting since he filed for bankruptcy. When
that falls off his credit report as expected next year, he says he
will likely look to buy a house.
Mortgage foreclosures stay on credit reports for up to seven
years dating back to the missed payment that resulted in the
foreclosure. Foreclosure starts, the first stage in the process,
peaked in 2009 at 2.1 million, according to Attom Data Solutions.
They totaled nearly 1.8 million in 2010 and remained above one
million during each of the next two years.
Personal bankruptcies are more complicated and can stay on
credit reports for seven to 10 years.
Consumers who filed in 2007 for Chapter 7 protection -- the most
common type of bankruptcy, in which certain debts are discharged
and creditors can get paid back from sales of consumers' assets --
are now starting to see those events fall off their reports. Some
500,000 Chapter 7 bankruptcy cases were filed in 2007, a figure
that swelled to nearly 1.1 million in 2010, according to the
Administrative Office of the U.S. Courts.
Chapter 13 bankruptcies, in which consumers enter a payment plan
with creditors, usually stay on reports for at least seven years.
Those filings reached a recent peak of nearly 435,000 in 2010 and
are set to start falling off reports this year.
(END) Dow Jones Newswires
May 29, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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