More than six million U.S. adults will have personal bankruptcies disappear over the next five years as bankruptcy data and defaults roll off credit scores.

As a result, credit scores have surged.

Fair Isaac Corp, the inventor of credit scoring algorithms, reports Credit Scores Hit Record High.

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 report.

“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.

Economic Ripple Effect?

Cris deRitis, senior director in the economics group at Moody’s Analytics suggested the credit boost “would have a ripple effect across the economy, increasing aggregate demand for goods and services.”

Nidhi Verma, senior director of research and consulting at credit-reporting firm TransUnion foresees a “domino effect for lenders”.

Both are way off base.

Home prices are through the roof and sales show signs of weakening. Are these previously foreclosed homeowners about to do it again?

Recent economic reports have been grim. Even if borrowers are ready for a second dip, lenders must be ready as well.

Second Quarter Reality

  1. April Durable Goods shipments down 0.3%, new orders down 0.7%: April Durable Goods: Yet Another Weak Second-Quarter Report 
  2. Wholesale Inventories: Down 0.3% in April. March revised lower from 0.2% to 0.1%.Retail Inventories: Down 0.3% in April. March revised lower from 0.5% to 0.3%. For details, please see Fed Eyes Second Quarter Recovery, Expects Trump Fiscal Policy Will Expand Economy
  3. Trade deficit in April widens by 3.8% with exports down and imports up: Trade Deficit Widens, Exports Weak: Economists Miss the Mark
  4. Tax Receipts: Federal Tax Receipts Running Below Expectations
  5. April New Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
  6. April Existing Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
  7. April Existing Home Sales: Spring Housing Flop: Existing Home Sales Decline 2.3 Percent, Inventory Issues Persist
  8. April Housing Starts: About that Strong April Recovery: Housing Starts and Permits Flop, March Revised Lower
  9. April Empire State Manufacturing Survey: Empire State Manufacturing Survey Turns Negative: Welcome News?
  10. April Retail Sales: Sales were at least positive (+0.4%), but they were well under economists projections: Retail Sales Disappoint Again: Department Stores Clobbered in 2017

The alleged ripple effect is more like what one would see throwing a rock in a sandpile, not a body of water.

Mike “Mish” Shedlock