The financial health of the average American credit-card holder is on the upswing while demand for new credit is declining.
Those are the conclusions of TransUnion, one of the three major credit bureaus, which tracks two indices that give important clues to the health of the credit market. The results that TransUnion released in its recent report puts the U.S. economy in the best place it has been since 2008. The results of the survey reveal that credit risk is at its lowest level in almost three years. Partially, this is due to the fact that consumers are managing their credit in a more responsible manner than they were prior to the downturn in the economy.
The Credit Risk Index (CRI) is a proprietary index of TransUnion. The index tracks the risk of credit, such as the likelihood of a consumer not making payments on their credit accounts, or the probability that a consumer will default. The Credit Risk Index is on the decline, and has been on the decline for five consecutive quarters. The decline indicates that consumers are less likely to default on credit card payments. All indications are that consumers are acting responsibly in managing and repaying their debt.
According to the global chief scientist at TransUnion, Chet Wiermanski, “The broad and steady decline in the Credit Risk Index, coupled with a moderate decrease in the demand for credit over the previous year suggests that consumers continue to live within their means, tending to acquire new credit only for larger, specific purchases. The percentage of consumers delinquent on any credit account has returned to the level immediately preceding the Great Recession, which is the primary reason for the decline in the Credit Risk Index. During this period, consumers have fundamentally changed the composition of their personal credit portfolio.”
Demand for Credit
A parallel development, according to TransUnion, is the decline in consumer demand for credit. Taken together, the two indices reveal that consumers are focused on paying down existing debt balances rather than increasing their debt totals. TransUnion tracks the demand for credit with the Total Inquiry Index (TII). Compared to the TII in 2000, the 2011 TII came in at a historically low level. In turn, this means that the demand for credit by consumers is historically low. The decline of the index from the first quarter of 2011 to the second quarter however, is the slowest decline since the first quarter of 2008.
TransUnion indices seem to back up the results of numerous other surveys that have been unfolding over the years. Overall, it does appear as if consumers have learned their lessons about taking on too much debt in an uncertain financial environment. The result is that consumers are managing their current debt better and heeding the yellow caution flag about growing their debt balances.