Credit Scores are Rising: What Does That Mean for Consumer Lending

Credit scores for U.S. consumers just hit a record high. Average scores hit 700 in April 2017, the highest the scores have been since 2005, according to Fair Isaac Corporation. Accompanying the credit score good news is that the share of risky borrowers has hit record lows. Consumers with a score below 600, traditionally considered “risky,” accounted for 20 percent of U.S. adults in the spring of 2017, down from a peak of 25.5 percent in 2010.


Boosting credit scores are the sloughing off of financial mishaps from tarnished credit reports. Over six million U.S. adults will see past personal Chapter 13 bankruptcies disappear from their record over the next five years, a blister that can aggravate an individual’s credit report for seven to 10 years. Chapter 7 bankruptcies too are finally disappearing from credit histories. Around 500,000 Chapter 7 bankruptcy cases were filed in 2007 and over one million in 2010, according to the Administrative Office of the U.S. Courts. But those who filed in 2007 for Chapter 7 protection can breathe a sigh of relief as cases are being expunged from their histories. Mortgage foreclosures, another bane, remain on credit reports for up to seven years, but these are waning. According to Attom Data Solutions, foreclosures peaked in 2009 at 2.1 million, reached 1.8 million in 2010, and remained above the one million mark through 2012.


The Landscape of Lending


The financing industry has experienced a sea change since the financial crisis. Traditional lenders, who rely on credit scores for lending decisions, have faced fierce competition from Fintechs, who use big data to provide rapid financing through apps to iPhone-wielding Gen-Xers and Millennials. Following the recession, qualifying for a loan was difficult, and many people turned to alternative lenders such as Lending Club and OnDeck. With refreshed credit reports, consumer may return to conventional lenders once again, and the competition in this space is palpable.


What does this mean for consumers and the financing industry? How will it affect the alternative lenders, who have thrived since the recession, versus conventional lenders? How will better credit scores affect baby boomers, Gen Xers, and Millennials?


Baby Boomer Borrowing

Baby boomers typically have the best credit scores having been fiscally conservative over the years. Baby boomers have held steady jobs and bought houses during better times. However, many are now having to supplement and care for aging parents, which is adding to their financial burden.


As many baby boomers delay retirement and live frugally, they will be encouraged by the economy, improved credit environment, and their access to financing.


Gen-Xer Libation … At Last


Gen-Xers have struggled to bring up families in difficult economic times. This generation has experienced student loan and credit card debt, a weak job market, and little support from strapped parents. Many are saddled with debt, and Millennial home owners have seen their properties drop in value.


This generation will be happy to see a freer lending market, and Gen-Xers will likely take advantage of their improved scores. With a sensible financial plan, this generation can recover from debt by tackling highest interest loans first.


Millennials Alt-lending Maneuvers


Millennials have been risk-averse and far from eager to jump into debt after seeing the fate of their parents. A 2016 study by FICO found that only 67 percent of 18 and 24-year-old Millennials have a credit card – less than any other age group. But the reluctance to borrow among Millennials has prevented the generation from building a credit history. Consequently, many Millennials are excluded from traditional lending markets because providers base decisions on credit scores.


This group is the most likely to turn to alternative lending when financing a home or a car because they lack a credit profile and face high-interest rates from traditional lenders.


Something for Everyone


While alternative lending might be by-passed by those with a strong credit history, all generations will be affected by a change in regulations expected to occur around the beginning of July. The Consumer Data Industry Association reports that most tax liens and civil judgments will be removed from people’s credit scores by July 1, or thereabouts, making the latter half of 2017 rosy for those feeling a little credit-pinched. Almost 1 million Americans could see their credit score improve by up to 20 points, and 700,000 Americans could see their FICO score increase by up to 40 points.


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