News & Trends

Consumer Debts Hit Record Highs, but So Do FICO® Scores: What Gives?

Americans owed more than $735 billion on their credit cards as of June 30, according to Experian, up 8% from a year ago and within earshot of all-time high levels. Overall personal debt—including mortgages, student loans, and auto loans—hit a record $12.9 trillion in the second quarter.

These grim milestones are causing concern that Americans are adopting the same kind of bad habits that led to the credit bubble in the mid-2000s. But at the same time, the average FICO® Score* for U.S. adults reached 700 for the first time in July, suggesting Americans have learned from their recent mistakes.

Perhaps Americans are feeling better about their finances despite the (geo)political noise. Wage growth, up 2.5% in the past year, is exceeding inflation (both are low), and the unemployment rate is really low— ticking up to 4.4% in the August jobs report released on Friday -- key reasons Consumer Confidence hit its second-highest level since 2000 in August.

But are consumers walking into another financial trap?

"We're near the end of the business cycle and we have a problem, with the subprime model lending," says Joseph Brusuelas, chief economist at RSM. "Income and job growth figures don't favor users with subprime credit."

As a result of growing income inequality and slower-than-normal growth since the Great Recession ended, Brusuelas says it is "entirely consistent..that you would see an increase in credit scores and [credit card] delinquencies given the role that subprime plays with autos and housing, which are the the most rate sensitive sectors in the economy."

Overall credit card delinquency rates remain near historic lows. But Experian's second-quarter data shows a 16% increase vs. a year ago for payments that are 90 days late or more.

RSM's Brusuelas says we should expect delinquency rates to keep rising. "We have a problem with the subprime lending model, and it is not a surprise to see delinquency rates rise at this point. There is some systemic risk in the market right now."

According to Experian, total subprime auto loan balances increased 11% in the second quarter compared to last year. However, the number of new subprime loans decreased 39% for the same time period.

Rising consumer sentiment and increased consumer spending helped the U.S. economy grow 3% in the second quarter, the fastest pace since the second quarter of 2016. But rising credit card delinquencies are a concern and the looming political battle over funding the government and tax reform could put a swift end to America's economic momentum.

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