Thursday, September 20, 2012

Better Credit Scores

U.S. consumers are seeing their credit scores improve, and it’s the result of the economic downturn. Better credit scores is not the first effect you would think of when you think of a recession, but it makes a kind of sense. A recession is often associated with deleveraging, meaning individuals and businesses are less eager to borrow (and banks may be less eager to lend). Then, when people pay off their existing debts and don’t take out new loans, their credit scores tend to improve.

Scores are improving the most at the low end and high end of the credit score range, according to a CNNMoney article, “Fewer people have terrible credit scores.” This makes sense to me. People with terrible credit pay the highest interest rates, so they have a special incentive to pay off debts as fast as they can. At the high end, people with the best credit tend to have a high earning ability compared to their lifestyles — that’s often how they stay out of credit trouble to begin with — so they have an easier time than others in paying down their debts. It is a trend I expect to see extend toward the middle of the credit score range as time goes on. If the people with the best and worst credit are paying down their debts, it seems likely enough that others are also, but perhaps not as quickly.