Think back about two years. It was virtually impossible for most people to get a credit card. If you hadn’t used your card in a few months, there was a danger the account would be closed, or your credit limit would be slashed to within a few dollars of your current balance. Things weren’t pretty for most consumers looking to buy a house, a car or obtain credit of any kind for any type of purchase.
Word on the street is that the lending environment has loosened up a bit and the credit market has improved — but is it true?
TransUnion credit reporting agency just released research that says it is.
For the third consecutive quarter, TransUnion’s proprietary Credit Risk Index shows that consumers are less of a credit risk. The CRI decreased by 0.9 percent in Q3 and stands at 126.79, the lowest level since the beginning of 2009. This shows fewer delinquencies and lower outstanding levels of debt, meaning that consumers are “focusing more on living within their means,” according to a press release issued by TransUnion.
It stands to reason, if consumers are now less of a risk, lenders may loosen requirements and take more chances. And evidence shows that they are.
Which Came First: Reports or Reality?
Something else interesting happened in the second and third quarters of 2010. The media began reporting that the recession is over, and, in fact, ended last year. (What? You missed it? Don’t worry … It was rather anti-climactic. No ticker-tape parade, fanfare, or $100 bills falling from the sky for the middle class).
With this news that the recession ended while we weren’t looking, people as a whole got less concerned about their financial future, job security, etc. and began to use credit more. This credit usage resulted in finance charges, which gave credit card companies some revenue to play with, which meant they could lighten up their lending restrictions a bit.
Combined with less consumers defaulting, making at least the minimum payments on their credit cards, and lowering their debt levels — as evidenced by the CRI — credit card companies are less gun-shy about lending money than they were in 2008.
So if you browse around a site like CreditShout, you will see plenty of credit card offers for low(-ish) interest rate and more generous rewards programs.
The catch? Most of the best interest rates, low annual fees and generous cash rewards that allow you to earn hundreds of dollars cash back for the year are available only for the best customers or “the super-prime credit market.”
But then you hear that it may actually be harder for people with a FICO credit score over 750 or so to get credit because they aren’t making the credit card companies any money … So where does the market stand as a whole?
Yes, the Credit Market Is Improving… Mostly
Richard Bialek of BialekGroup, an advisor to CEOs in the payments industry, notes, “Delinquency rates and credit loss rates are declining, and both Visa and MasterCard have reported growth in card purchase volumes.” Those are just a few more signs pointing to yes, the credit market is improving.
Bialek isn’t the only one who says so: I spoke with a lot of experts within the finance industry, including credit counselors, and all but one seem to believe the credit crunch is over for super-prime borrowers and we should look for improved lending conditions for consumers with good-to-excellent FICO credit scores soon, too. Some experts say it’s happening already, with good credit card offers available for those with mid-range credit scores.
In addition, with the Fed holding interest rates so low, credit card companies are in a better position to make money by keeping their rates and finance charges stable. Gone are the days of 0 to 3 percent interest on revolving credit — at least for now. We’re still getting 10 % to 12% and, after the Great Credit Crunch, are thankful for it. Especially when our lender throws in cash back rewards and other extended benefits to make card holders feel like they’re getting a good deal.
Sub-prime borrowers will still have issues finding fair deals, though, and economic indicators show that the “crunch” is far from over.
As Bialek points out:
- The economy is still weak
- Unemployment is over 10 %
- The housing market still has not recovered
All of these things point to weak growth in the credit market, albeit not as bad as we’ve seen in the past few years. And even weak growth is growth, not stagnation.
What can consumers do to take advantage of greater credit availability? Nothing new here. Pay your balances on time. Pay more than the minimum is due. And keep an eye on your debt-to-available credit ratio in order to keep your FICO score as high as possible.
Do these things and soon, you too can be saying, “Yes, the credit crunch is over.”