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As bankruptcies disappear, US credit improves

Jun 29, 2017 Walt Wojciechowski

As bankruptcies disappear, US credit improves

In the wake of the 2008 recession, many American families and businesses filed for bankruptcy, leaving a black mark on their consumer credit reports. According to the Administrative Office of the U.S. Courts, the fallout peaked in 2010 when around 1.6 million bankruptcies were filed.

Since then, those who filed have had to live with low credit scores and the negative effects they have on securing affordable credit products or any at all. The severity of a bankruptcy may lead to deductions of as much as 220 points off a related credit score.

Thankfully, bankruptcy is not forever. Eventually these credit blemishes disappear, usually in about seven to 10 years. So for those 1.6 million who filed in 2010, as well as the millions of others who filed around the same time, the wait is almost over.

Better yet, the best years for credit scores in America may be close at hand.

Bankruptcy filings slow as the economy recovers

As the nation heals from the most painful economic downturn felt this generation, fewer people and businesses today are filing for bankruptcy than in years previous. A lot fewer.

Between 2012 and 2016, the number of business bankruptcy filings fell by more than 42 percent, while non-business filings dropped by more than 37 percent - again, according to analysis from the Office of U.S. Courts. In 2016, total bankruptcy filings capped at a little over 819,000, which is about half of the worst we saw post-recession.

Bankruptcies coming off credit scores en masse

In turn, credit scores in general are on a marked upswing. A Barclays PLC Annual Report for 2016 stated the next five years will herald a steep dip in bankruptcies on personal credit reports. The multinational bank published analysis in May that estimated more than 6 million adults in the U.S. will shed handicaps incurred upon filing for bankruptcy between now and 2022.

This massive shift has already begun to raise the national credit score average. A recent FICO study revealed the national credit score average hit an all-time high at 700 this past April, and the number of Americans with suboptimal scores - lower than 600 - fell to a record low of around 40 million.

What is the takeaway here?

Over the last decade, lenders have had to make difficult decisions regarding extending loans or lines of credit to those who suffered from extraordinarily adverse economic conditions. But as more Americans bounce back from the recession and their credit scores improve, lenders should consider whether they're using every resource at their disposal to measure and interpret lendee risk.

Alternative credit data - assessed through payment of energy bills, smartphone bills, etc. - has not factored into traditional credit scoring models, but it does paint a clear picture of a person's solvency and financial responsibility, especially those millions of adults who lack credit altogether, known as credit invisible.

To welcome a new era in lending and reach a wider audience with your lending products, contact a Microbilt representative today or learn more about alternative credit data on our blog.