Healthier Credit Scores Point to Bullish Economy

Investors have more than recovered their losses following the Great Recession, but the consumer recovery has been somewhat slower. After reaching 10% in late 2009, the unemployment rate only recently returned to its pre-crisis levels last year. The good news is that the economy appears to have stabilized and recent credit rating data shows that consumer credit is healthier than ever in nearly every city measured.

Here's a look at Experian’s 2016 State of Credit report and what the data tells us about the economic recovery and outlook moving further into the new year. (For related reading, see: Stocks Begin the Year on a High Note.)

Improving Credit Scores

The most surprising takeaway from Experian’s 2016 State of Credit report is the broad increase in credit scores across the nation. Glendive, Mont., was the only city reporting a decline in credit scores while Victoria and Odessa-Midland in Texas were the only cities with scores that remained the same year-over-year. Every other city measured by Experian—including those in the bottom 10—reported increases in average credit scores.

Only 12 cities in the report had scores above 700 despite the broad improvements, but 142 cities scored 661 or higher. This means that 67.2% of all cities fell into the prime or super-prime’ credit tiers, which could make it easier for borrowers in those cities to access loans for homes, cars, or other purchases. Accelerating middle- and lower-class household incomes translate to less credit stress for consumers across the board.

These improving credit scores are great for consumer balance sheets, but could prove to be a mixed bag in terms of economic growth. Credit utilization rates remained consistent at 30% year over year, which means that the higher credit scores are likely due to greater income rather than reduced utilization (e.g. consumers paying off debt). The 0.59% increase in average debt per consumer to $39,216 could provide a boost to economic growth. (For related reading, see: The Problem With Big Data in Financial Services.)

Generational Differences in Credit

There are also many important takeaways from when looking at generational differences in credit scores and credit use. When it comes to economic contributions by generation, companies and other individuals may want to focus on Baby Boomers and Generation X consumers that have the highest debt utilization rather than older individuals in the Silent Generation that have among the lowest utilization rates. Unsurprisingly, older individuals have higher credit scores due to a longer credit history, greater access to credit, and overall wiser use of credit. In fact, individuals born prior to 1947 have a credit score that’s an average of 100 points higher than those born after 1996. These older individuals have lower utilization rates, however, which means that their higher scores aren’t necessarily translating to greater spending.

Baby Boomers and Gen Xers have the highest average debts, credit card balances, and retail debt levels. This suggests that they are utilizing their credit the most and contributing to underlying economic growth. The so-called Silent Generation has the lowest utilization, although their retail debt exceeds Generation Z individuals—the young demographic that follows Millennials—that have the lowest average credit scores.

The Bottom Line

Experian’s latest credit report shows broad gains in average credit scores among consumers throughout the country. This is good news for economic growth since greater access to credit could accelerate spending on items like houses and cars. But it’s important to note that credit utilization tends to vary widely based on generational differences. The older generations tend to have lower utilization rates, which means that their increase in credit score could translate to less spending than younger generations that tend to take advantage of rising credit scores.

Source: www.investopedia.com