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
- April Durable Goods shipments down 0.3%, new orders down 0.7%: April Durable Goods: Yet Another Weak Second-Quarter Report
- 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
- Trade deficit in April widens by 3.8% with exports down and imports up: Trade Deficit Widens, Exports Weak: Economists Miss the Mark
- Tax Receipts: Federal Tax Receipts Running Below Expectations
- April New Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
- April Existing Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
- April Existing Home Sales: Spring Housing Flop: Existing Home Sales Decline 2.3 Percent, Inventory Issues Persist
- April Housing Starts: About that Strong April Recovery: Housing Starts and Permits Flop, March Revised Lower
- April Empire State Manufacturing Survey: Empire State Manufacturing Survey Turns Negative: Welcome News?
- 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
It’s a pity one can’t order comments without first leaving a comment.
I used to be up to the hilt with personal loans when I was investing into a business venture which luckily paid up. I was rather worried since in our country personal bankruptcy is not an option. For this reason people who fail to pay back their loans are doomed forever. Their misery lingers on and on for decades. Last time this happened was early 1990’s when thousands of small and medium sized businesses went belly up. Thousands took their own lives.
So I am for cleaning up the table and having second chances. Nobody benefits from sticking to a situation that can’t be revived. And we all have just one life.
+ lots.
Access to quick, cheap and final bankruptcy; is one of the most important legal constructs for a growing, dynamic economy. The quicker, cheaper and more final, the better. In all of engineering, “fail fast” is a guiding principle: Things should be built so that if they do fail, they should fail as quickly and as incotrovertibly as possible. That way, they can be quickly fixed,and retried. Dragging on in a limbo state, is exactly the worst possible way to build anything. Including BK processes. Japan is a prime empirical example.
Americans used to have uncommonly easy access to bankruptcy protections. But over the past 3 decades, those have been chipped away at. For no other reasons than that it makes it easier for banksters to pretend that loans that cannot be repaid, are somehow still money good. Just like in Japan. And because it makes utterly arbitrary rule simpler to enforce, and large numbers of people pliable and dependent. Which is always and everywhere the goal of every government and self styled “ruling class” everywhere.
It i seven more sinister. The banks sold the debt to private loan companies that cut a small (but significant) portion of the welfare payments or pensions and at the same time the capital sum and interest just keeps piling up in the hope that the person someday might inherit or win in a lottery.
So basically the money that is meant for survival partly goes to these bloodsucker companies and these people have no chance to rebuild their lives. Although, many have left abroad where they can’t be reached. Most of them were hardworking entrepreneurs and now they are outcasts in society. Funnily enough, nothing has been done to protect business holders from falling through all social welfare nets. Those are built just for the normal workers as if those trying to run businesses were somehow suspected of being half criminals. Socialism in full swing.
Seen business owners robbed of their properties with pennies and sold to “close friends” of the bank and asset managers. And left with a mountain of debt that can never be repaid.
Which country please?
Finland.
We had financial difficulties early 1990’s due to that much of the debt was in other currencies than our own Mark. Sweden had similar problems. Finland joined euro but Swedish people voted against deserting their Crown.
In Finland the business elite used the event as way marketing the euro as a savior. Some of them used their own newspapers to establish the wanted result (this is not some hearsay, they admitted it later). Now it’s been slow decline when euro benefits mostly Germany and leaves us with little chance other than internal measures as lowering salaries and hiking taxes which leads to more slowing economy which leads to… Sweden at the same time has benefited being in euro zone with their own currency.
I guess, India. Lots of suicides by farmers in receent years, too.
That’s horrible. And Arab traditions (like taking your kids away to pay for debt…..) makes even European (lack of) protections seem positively generous and sensible. So it’s not like the ever expanding Caliphate is likely to come to your aid…….
America used to be different than that. Perhaps due to greater sensitivity to anything that smacked of slavery than most other cultures, there was some notion that if you went bankrupt, you could lose everything you owned. But no creditor could own carte blanche claims on your future labor. To riff on a famous Clint Eastwood line: They could take away everything you got. But not everything you were ever going to have…. As the latter makes you no more than a de facto slave.
But now, first with student loans, then in ever expanding circles, those protections are being chipped away at. All in an effort by the privileged ruling class, to entrench themselves as unchallenged slave owners over the rest of the population.
A friend with a good job found out that one cannot run up debt to the level that there will be nothing left for food. The WHOLE paycheck gets grabbed by credit card companies…
1. Do you think they learned a lesson? Funny how the folks who lived through the great depression learned a LIFE TIME lessons.
2. Except student loans. Those follow you even after bankruptcy.
3. Just in time for the obama housing bubble to go boom…the cycle will repeat.
“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.”
Years ago I paid off my mortgage, wrote to the credit bureaus for a credit freeze, have taken on no new debt and added to my savings. True to formula my score has one down.
Credit scores show a history of taking on and paying debt. They do nothing to show a person’s capacity to take on new debt. They were one of the most abused pieces of data leading up to the financial crisis of the last decade and in many regards nothing much has changed.
The real ripple effect has come through a period of inflation that escalated when fiat money became the norm. The idea that super high interest rates put an end to the inflation monster is a myth. Assets of every kind have continued to inflate in value, but value is relative as most individuals do not understand. Credit expansion has served the inflation monster well since the FED said the recession was cured by zero interest rates. You see, when normal interest rates, the ones that reflect true risk, are interfered with, the investors and speculators (today there is little difference between the two) must chase higher yields through higher risk. Of course the idea that one builds wealth gradually through good investment is passe. We are being taught that we must double our profits at least yearly if not quarterly. We seek to be in on the next IPO that is guaranteed to make us at least multi-millionaires. We live in a word of greed and avarice as if that’s the way it should be.
The robber barons prior to the turn on the 20th century lived in their age of conspicuous consumption. How many owned luxury yachts and Pullman cars? Most of that came to an end with the great depression. It started back up after the war and our noveau rich thrive on their particular form of conspicuous consumption. Why give to charity when you can set up your own institute free from taxation and indulge in giving funds to any and all interests you may have. This is the Zuckerberg model, which he copied from Bill Gates. Even Warren Buffet has gotten into the act. But the best example of the worst of intent is George Soros.
The ripple effect has always been with us through some twenty or thirty of mankind’s history. some will say that the amplitude has increased to tidal wave proportion. Perhaps, but that amplitude is nothing more than inflation.
And then we have the Clinton model. Set up a “charity” Foundation so that people can give you money and then deduct that “giving” on their own taxes.
Legal bribery and influence peddling with a tax advantage.
“Why give to charity when you can set up your own institute free from taxation and indulge in giving funds to any and all interests you may have. This is the Zuckerberg model, which he copied from Bill Gates. Even Warren Buffet has gotten into the act. But the best example of the worst of intent is George Soros.”
he funny thing about deceiving others is that we tend to deceive ourselves. We may be evil incarnate but we will portray ourselves as angels and believe our own lies.
Buffet spent years, looking all over the planet for who he wanted to leave his personal fortune to.
At a time when Earth is inhabited by some 6,750,000,000+ human beings, he decided to leave his wealth to the lone single person on Earth that needs the money EVEN LESS THAN HE DOES!
He left it to Bill Gates.
“You see, when normal interest rates, the ones that reflect true risk, are interfered with, the investors and speculators (today there is little difference between the two) must chase higher yields through higher risk.”
Reflect true risk of what? How are you sure current prices are not reflecting that? What should they be and why?
Risk determine the time value of money although many might believe it to be the other way around. You ask me to lend you five dollars till payday. What premium should I ask and what premium will you pay? The greater the risk the greater the expected return. Thus one percent interest would normally represent little expected risk while ten percent represents a very large risk. And risk means not only to loss of ones capital but the loss of one’s premium.
But the problem of risk analysis is bedeviled by fiat money. Value has no anchor, no real measure. It is like a rubber ruler, a foot is however long or short you may wish it to be. The problem is not that the rubber ruler doesn’t give an accurate measurement, it can’t give a repeatable measurement. If I cut a length of wood and tell everyone it is a foot long, it may be off either way by two inches. But at least it gives repeatable measurements.
The value of a dollar today has a different value tomorrow but how can you tell if you can’t reliably measure that value? In a fiat currency, what should interest rates be? You tell me, we have no standard by which to judge risk. thus we are reduced to the rule of thumb that says, chase higher risk because it’s the only game in town.
but if risk is mispriced wouldn’t there then be an advantage to one side. Can’t I either buy or sell bonds? If it is mispriced shouldn’t you be trading it?
The problem with fiat money is that it become difficult to know just where and by how much risk is misplaced. If I think/believe that there is greater risk for future for oil because on the coming economic downturn/recession/depression then I should sell short on suppliers and drillers. Maybe I should be placing bonds or buying bonds in other assets other than energy. The problem for investors for the almost last ten years is that the FED’s interference in the interest markets has led lack of any valid signal by the market. Should I buy less than AAA rated bonds? Would BBB be alright if the yields were high enough to offset the risk? So maybe I do some sort of bond ladder where I buy some AAA, some AA, and so forth so that my investment in the BBB offers me a big reward if I guess right, and that is the operative word, and a minimum of loss if I guess wrong. As Hayak says, it is impossible for any one person to know all the information about the market at any one time. But we have come to a point where whatever information worth knowing is fleeting and possibly wrong. Thus we are reduced to shoot dice with the market. I see some acknowledgement of this problem but most individuals tend to ignore the problems. If luck is with them then they will be right. If not, well, money isn’t every thing.
samijr, I can identify with every word you have posted.
I am convinced it’s not all negative conspiracy theories to believe there are dark forces at work promotiong the EU and forcing the Euro.
Good luck.
Analysts have disappointed me with their lack of critical thinking skills.
With all the data available I have to ask if simple credit scores will be given great credence in future?
Outside of the visible credit score do you believe there are no other scores or information shared about past credit events an individual has been through?
I don’t think this will make much difference and criteria will tighten for those with previous bad credit events but no one will be told so. It will just happen as those offering credit share information and rates rise and there is some dark pool of history on a borrowers performance.
So – I would expect very little positive economic ripple and dark pools of data to exist that will lead to tightening of credit criteria for previoulsy stressed borrowers – but no instituation will be transparent about it.
A possible return to the 70’s stagflation with the old mantra “you can borrow when you can prove you don’t need the money”, especially for those with a previous credit event even if their easy to see credit score is wiped clean. Its the unseen score that will matter and I don’t believe that doesn’t exist post sub-prime etc.
If you live within your means and pay cash then you understand compound interest and deferred gratification.
indeed, the notion that debt equals prosperity is so wacked only a academic living paycheck to paycheck could have come up with it.
Compound interest on 0.001%???
Do you jest?
1. Artificial is the wrong word here. A bankruptcy years ago is clearly less of a credit risk than a bankruptcy a month ago. As time goes on it is natural that a surge in bankruptcies that happened years ago reduces its negative impact on credit scores.
2. Any decent credit scoring algorithm should avoid ‘magic cliffs’. A person shouldn’t leap from a poor score on Monday to a great score on Tuesday simply because that marks the 5th or 7th anniversary of a bankruptcy filing. A algorithm should have a big negative impact the moment of bankruptcy but slowly decrease that impact as time goes on with no additional negative events. The moment the bankruptcy drops off of a report then should be a minor event.
Credit rating companies hold a lot of power over those who need credit, insurance and jobs. Bad credit scores jack up millions of consumers borrowing and insurance costs and make decent jobs impossible. Puts them in a downward spiral. Conversely rising credit scores reduce their costs and make them more employable.
I wouldn’t describe the aging out of bad credit associated with events such as BKs to be artificial, it’s just one of the rules of the game as devised by Fair Isaac etc.
of course, paying cash and living below your income means you don’t need credit.
I bought a new car for cash a few years ago, the salesman waved a credit check form in front of me and said they had to do a credit check, I said ,why, I’m paying cash? “The credit manager says so”. I said ask him to come out here and explain why I need to permit them to run a credit check on me for a cash sale. No credit manager appeared , no credit check required.
These people and businesses run you in circles for unknown reasons for their benefit. Fair Isaac has made themselves BMOC.
The same thing happened to me – I live in a state where I can lock all three major credit agencies – when somebody runs a credit check on me, it appears as if I don’t exist – I use this as one way to protect myself from identity theft.
The car dealership insisted in running a credit check. I told them what would happen when they did, and asked if they would pay the $30 fee to temporarily lift the freeze, or if they just wanted me to go to another dealership to buy the car.
They took the money. No credit check required.
Clearly the ‘credit manager’ was yet another salesman trying to score a commission by selling a loan on as many buyers as possible.
Good credit scores for everyone!
And a gas gauge that only reads full!
Woo Hoo!
Interrogation scene from the film Brazil:
https://www.youtube.com/watch?v=NA9B6-s6r7Y
[youtube https://www.youtube.com/watch?v=NA9B6-s6r7Y&w=560&h=315%5D
“Don’t fight it son. Confess…QUICKLY. If you hold out too long you could jeopardize your credit rating…”
The 2005 bankruptcy law made debtors a little more accountable, but what really made a difference was the financial crisis. Banks no longer hand out credit cards like candy, and credit limits are no where near what they once were. I know of a cook at Burger King who had fifty thousand in credit card debt wiped clean by a chapter 7. That could not happen today, not because banks wouldn’t love to return to the old days of easy credit and housing bubbles, but because they would go out of business. As bank credit and money supply contracts worldwide, as it has since the financial crisis, bankruptcy is less important because the banks themselves are much more careful who they give credit to, and that includes some very questionable banks in Asia and Europe. Let’s see how Merkel changes her tune when Deutsche Bank is begging the Fed for dollars.
BK’s and foreclosures ticked up last quarter, while not a trend, something to keep an eye on. As far as credit and home price? Perfectly normal:
https://fred.stlouisfed.org/graph/?g=dUM6
So it seems to me that one part of our economy might suffer a downturn from this bulge of newly accredited borrowers – the payday loan industry. Maybe the need to high interest, short term credit will decrease when people have lower cost options becoming available to them?
Consistent with some of the other comments, I have to think that lenders almost certainly have non-fico metrics they can use? Especially given that even years on (and the removal of the flag) prior bankruptcies are still a meaningful indicator of elevated credit risk. http://libertystreeteconomics.newyorkfed.org/2017/05/do-credit-markets-watch-the-waving-flag-of-bankruptcy.html
rinse & repeat.
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.”
What about the ripple effect of massive auto loan fraud? We already know what happened last time, after massive mortgage fraud. It was more a tsunami, than a ripple effect.
Lowering credit standards, irrespective of how that is accomplished, is one of the tried and true tools of extending a credit bubble.
Replacing Ed DiMarco with Mel Watt at the Federal Housing Finance Agency (FHFA) is yet another of such “tools”, is it not?
Great so people will just acquire more revolving credit card debt to aquire more ‘stuff’ at an average Apr of 15% so they can feel good about themselves and look down upon others who aren’t wearing expensive labels and who don’t have the latest iPhone or laptop. Meanwhile prices will surge across the board as consumer spending goes parabolic due to this surge in easy credit
The vomit never stops, even for a minute.
On the bright side, Mish has no shortage of things to write about. Better to understand what is happening than not.
Humanity, historically is a autoimmune disease, killing millions of each other
For some narrative it thinks up in its mind that never shuts up, never fulfilled.
So of course none of the narrative out of the credit bureaus makes any sense.
And it may well play out but if these guys don’t create more problems that they can
Think mindlessly all day about how will they stayed employed and come up with the
Next new thought moving towards more aimlessness? As long as they are thinking
The shit piles higher.
“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.”
…
Seriously? Have many been denied credit .. even with bad scores?
Just as likely lenders might feel the crimp in earnings as subprime credit (only the monthly matters) households catch a break and pay lower interest.
And we know they’ll likely walk at the first sign of TSHTF just ike last go round …the slap on the wrist they received will only encourage that behavior.
… lenders must be ready as well. Mish
“Lenders” is way too kind a word in the case of banks. Government enabled counterfeiters is closer to the truth.