Borrowers With Bad Credit Are Using More Credit Than Borrowers With Good Credit

It seemed that America’s romance with credit was on its way out. Of course, this might have something to do with the fact that the American economy has not been doing so well since its heyday before the turn of the century/millennium. As a matter of fact, fewer people are skipping credit card payments these days, then they have in recent years.

This is a bit of good news from the FED’s quarterly household debt and credit report, which the agency released on Tuesday. Looking more closely it becomes clear that the improvement in payment rates is likely due to the fact that banks have been more strict on credit issuance, particularly in restricting credit access to those with low credit scores (thanks to the Great Recession of 2008).

But this seems to be changing. More people are getting credit these days—albeit via auto loans and credit cards—and today’s total household debt in America has increased $35 billion to reach $12.3 trillion last quarter. Thankfully, total household debt is still 3 percent lower than it was at its peak—$12.7 trillion, just before the 2008 recession—but we are currently 10 percent up from the same metric’s lowest point, which fell at the end of that recession period.

Growing Credit Availability?

Now, growing credit availability has long been considered a sign of healthy economic growth; it indicates that people are willing to spend more money. This may be good in many regards, but when all that credit is going to people with lower incomes, the uptick is not quite so stable.

And the New York Fed says that banks are increasing the median limits on how much low-credit-score borrowers (under 660) can have and concurrently increasing the median limits on how much they can spend. For example, in 2009, the median credit card limit was only $500; but that doubled in 2015.

Similarly, spending limits for those with credit scores between 720 and 779 grew from $3,00 to $5,500; those with the highest-rating of 780+ saw their limits nearly double as well: from $4,200 to $8,000.

In addition, the Fed report also found, perhaps more importantly, that those with lower credit scores appear to carry higher credit card balances than those with higher credit scores.

In the report, the Fed writes: “Lower-credit-score borrowers, once squeezed out of the market and paying down debt, are beginning to recover their ability to access credit with newly opened cards—although the borrowers with high credit scores are seeing the biggest expansions to their borrowing limits.”

This says, Moody’s Analytics senior director Scott Hoyt, is “something we need to keep an eye on if borrowing continues to grow rapidly.”

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