American consumers rarely have been such a bad bet. With unemployment up and salaries down, credit worthiness has plummeted.
Nearly half of American households have credit ratings that are high risk, according to Credit Karma, and the average credit score has dropped more than 20 points in the past three years.
Banks don’t care.
With the government keeping lending rates at historic lows, banks are desperate to lend out cash — and are willing to ignore warning signs to do it.
The same “subprime” mentality that drove lending before the 2008 financial crisis has not gone away, analysts say.
“The requirements for auto loans and credit cards are definitely decreasing,” said Ken Lin, CEO of Credit Karma.
“These products are now profitable for the banks again. As a result, banks are increasing advertising and lowering the credit requirements to increase profits.”
And consumers can expect the spigots to open further, says Lin.
“Auto loans and credit cards are poised for expansion again, as those sectors are profitable,” he said. “Mortgages should hit that point within the next 18 months.”
So far, few consumers have bitten at the banks’ offers — or perhaps they can’t afford even the low rates.
Borrowing registered a seasonally adjusted $2.705 trillion in July, the first decline in almost 12 months.
In the 24 months leading up to August 2012, average credit-card debt per account holder plunged from $7,694 to $5,403, and average mortgage debt had dipped from $174,447 to $166,990, according to Credit Karma.
Like any statistic, the reason behind this decrease depends on who you ask. Some analysts say Americans have become more frugal. But others attribute the decline to one-off factors such an bankruptcy, default and debt forgiveness.
While higher rate credit card debt may be falling, meanwhile, the US consumer has turned to other forms of credit to get by.
“In part, consumers may be shifting debt from one type of borrowing to another,” said Richard Barrington, senior financial analyst at MoneyRates.com. “For example, while credit card debt has come down in recent years, other forms of non-mortgage personal debt (car loans and personal loans, for instance ) have been rising. The net result is that overall non-mortgage debt was higher than ever as of mid-year.”
Barrington added: “That shifting may be a function of rational choices by consumers. Not only are other types of loans typically cheaper than credit card debt, but interest rates on car loans (and mortgages) have fallen more than credit card rates have in recent years.”
Average student debt jumped from $28,183 to $29,092; auto loans from $15,186 to nearly $16,000.
Recent numbers showed mortgage debt at $13.5 trillion, student debt at $1 trillion.
Shoppers also are swiping plenty of plastic, with household debt averaging $15,587.
No two ways about it: The consumer is in a tight corner.
“Credit scores are still relatively low because consumers are still feeling the effects of the bad economy,” Lins said. “In cases of foreclosures and unemployment, it takes time to work through the credit-score system.”
And yet Lin sees spending being scaled back only marginally.
“Hopefully the experiences of this great recession will temper consumer spending habits,” he said.
The widely followed FICO credit scores (FICO is the company that determines them) show a divided nation.
The proportion of consumers with good credit scores — in the 800-to-900 range — shot up a couple points to 19 percent in the most recent data. That’s at its highest level since October 2008.
On the other hand, the picture is grim down the scale: Just 35 percent of consumers had middling FICO scores of 700 to 800.
And a stunning 46 percent of consumers have little or no creditworthiness at all, thanks to their bottom-fishing FICO scores.