The average credit score for U.S. consumers rose to a four-year high of 696 in May, according to Equifax, one of the three primary U.S. credit bureaus. This is the highest the average credit score has been since 2007, right before the nation fell into a severe economic recession from which it is still struggling to recover. Some of the reasons for the rise in the average credit score is the decline in debt to income ratios and the decline in delinquencies. Credit card delinquencies have dropped as much as 30% in a two-year period, according to the Federal Reserve.
Boost in Consumer Spending
Aquarterly Federal Reserve survey released in May, also showed a pick-up in demand for auto loans in the second quarter of 2011. In the first quarter of the year, loan officers saw an overall increase in consumer lending, which, according to the Fed, is the first increase since 2005.
Commenting on the improvement in consumer scores and household liquidity, James Paulsen, the chief investment strategist for Wells Capital Management, said, “The financial situation of the household sector has improved far faster and far more than everyone thought it would two years ago. There has been a change that is sustainable and durable.” The ratio of consumer debt payments to income is the lowest since 1994, according to Fed data.
Decrease in Consumer Debt
While consumers are taking on new debt, such as auto loans, they are still working very hard to reduce overall debt and specific debt, such as credit card debt. According to the Federal Reserve Bank of New York, the 10 consecutive quarters ending in March 2011, marked a reduction in consumer debt of more than $1 trillion.
Economist Stephen Roach, non-executive chairman of Morgan Stanley Asia, believes consumers will continue to cut debt “a minimum of another three to five years.” Despite the fact that households are increasing their savings and monitoring their debt obligations, debt is still high.