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Following two quarters of lag, credit risk decreases

Sep 22, 2012 Walt Wojciechowski

According to TransUnion's Credit Risk Index, the past two quarters of increasing risk among the credit-using population were reversed this quarter despite a consumer borrowing increase. Consumer credit data shows an additional 21.4 percent rise in demand for consumer credit, a sign of economic recovery. "The increase in consumer-initiated inquiries indicates stronger consumer demand for credit," said Charlie Wise, director of research and consulting for TransUnion. "[The rise] may be a signal that consumers are beginning to increase their spending on discretionary items and larger-ticket purchases, reflecting stronger consumer sentiment and confidence toward the U.S. economy." Consumers following through with payments
Consumer borrowing has increased this quarter, however, especially regarding bank cards and auto loans. Despite this rise, consumers continue making regular payments on their mortgages. All 50 states experienced decreasing credit risk this quarter, with an average drop of 6.53% in TransUnion's index. This is in stark contrast to last quarter, when 31 states saw an increase. "Delinquency rates for major loan types have all declined in the first half of 2012, and that contributed to the drop in the risk index in the second quarter," said Wise. Number of Americans in highest credit tier on the rise
According to a May consumer credit report by Fair Isaac Corporation, the number of Americans with an optimal credit score (800-850) has reached its highest since 2008. But as many consumers reach high-tier scores, many scores have lowered, leaving the number of consumers in the 700-749 range at 15.5 percent. The largest percentage of Americans belong to the 550-699 range (31.9 percent), with many from the lowest-tier moving up this quarter, leaving the 300-549 range at its lowest since 2006 (14.9 percent). One FICO employee noted that this shift away from the bottom may have resulted in part from lenders writing off bad debts and closing risky accounts, implying that the shift may not necessarily mean positive economic growth overall. Despite some lagging credit scores, others flourish, and increasing consumer borrowing and declining delinquency rates among major loans provide clear indications that the improvements seen this quarter may become more commonplace.