Bankruptcy Law Blog

Tuesday, July 19, 2016

Consumer Debt on the Mend

How can I improve my FICO score?

In the wake of the financial crisis of 2008, many consumers saw their credit scores fall into the subprime zone with FICO credit scores in a range from 300 to 599. Now, the percentage of subprime borrowers is hovering at 20 percent, which is the lowest level in over 10 years. By comparison, in 2010 that figure peaked at 25.5 percent as mortgages, credit cards and other consumer debts went unpaid, and this prompted banks to tighten lending standards.

There are a number of factors that are contributing to the improvement of credit scores. First, during the financial crisis many consumers lost their homes through foreclosure or had credit-card debt charged off. Now that time has passed, these incidents have dropped off credit reports which has helped to boost scores. Further, the overall economy has improved as evidenced by an unemployment rate of 4.7 percent. Because more people are working, it has become easier for them to pay their debts. Lastly, low interest rates have helped consumers pay down credit-card debt.

In addition, not only are credit scores on the mend, fewer consumers are in default. In 2009, the default rate for consumer loans such as mortgages, auto loans and credit cards was over 5.5  percent; today that figure has fallen to just 0.81 percent and this is largely due to a sharp drop in mortgage defaults.

Given these trends, banks and consumer finance companies have been able to increase lending without lower credit standards, enabling more consumers to start borrowing again. In fact, auto loan balances are now more than $1 trillion and credit-card debt could reach $1 trillion in 2016.

While the overall improvement in credit scores, and more borrowers being able to access credit is good news, excessive credit-card debt could push many borrowers into financial hardship.  Moreover, the roughly 20 percent of borrowers who are considered subprime may not have access to credit, or find themselves paying very high interest rates. For those who are still struggling to pay their debts, there are options such as debt settlement, or in the alternative personal bankruptcy. If you have questions about either of these options, you should engage the services of an experienced bankruptcy attorney.

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