Credit Scores Soaring

America, give yourself a pat on the financial back.

Credit scores for U.S. consumers reached a record high in the spring of 2017. After years of hearing about bankruptcies, foreclosures, underwater mortgages and unpaid credit card bills, it was good so see evidence of an economic revival.

The average credit score was 700 in April 2017. That is the highest since 2005, which was two years before the Great Recession turned America into a modern-day version of “The Grapes of Wrath.”

Everybody had the same credit score in the John Steinbeck novel, since credit reports weren’t around in the 1930s. Even if they had been, Dust Bowl refugees would have been too weak from starvation to worry about having their flat-screen TVs repossessed.

Not so for consumers drowning in debt during the Great Recession. Their credit scores fell off a cliff when they overused credit cards or underestimated mortgage payments and wound up having to dodge debt collectors for the last decade.

Their hard times might not have compared to the Great Depression, but there are still hard lessons to be learned.  The biggest one is to stay out of unmanageable debt.

The key word there is “unmanageable,” because there’s plenty of red ink still out there. In fact, just as the average American’s score was rising to new heights, U.S. household debt was also reaching its all-time high.

The tally was $12.73 trillion in the first quarter of 2017. That was $50 billion higher than the previous debt peak in 2008.

The credit score and household debt numbers seem at odds since 30% of your credit score is based on credit utilization – how much debt you put on your cards. The simple explanation is that that overall household debt was mostly in actual houses, not plastic.

Americans carried $779 billion in credit card debt in 2016, according to NerdWallet study. They had $8.48 trillion in mortgage debt, or more that 10 times what they owed on their credit cards.

“Fundamentally, the scores reflect how people are managing their debt regardless of how large that debt may be,” said Rod Griffin, the director of public education at Experian, one of the three major credit-reporting agencies.

There’s that word again – manage.

There always has and always will be debt, and that’s a good thing unless you want to see a large percentage of the population living under bridges. Debt allows us to buy things like homes and cars we couldn’t pay cash for.

It became unmanageable to millions of consumers when the value of their houses collapsed. There were almost 1.6 million bankruptcy filings in federal courts in 2010. That number dropped to 794,960 in 2016, which was the lowest since 2006.

Bankruptcies and foreclosures destroy a person’s credit score. Most stay on the credit report for seven years. That means the avalanche of bankruptcies of foreclosures is now losing its drag on scores.

“Those years are reaching the end of that cycle,” Griffin said. “We’re sort of working through the remains of the downturn and seeing credit histories improve.”

High-risk borrowers, those with scores below 600, represented 25.5% of the market in 2010. That turned them into lepers as far as lending institutions were concerned. The Federal Reserve reported that excess reserves went from near zero at the start of 2008 to nearly $800 billion in less than a year.

Banks preferred to sit on cash instead of lending it to risky consumers. That high-risk group is now down to 20%.

“The higher scores tell us they’re paying on time and not maxing out their credit cards,” Griffin said.

Good management, in other words.

Higher scores mean more available credit. More credit means more spending. More spending means a hotter overall economy.

“That speaks to a positive trend in terms of economic outlook,” Griffin said, “and confidence in the ability to manage debt.”

The worry is that things might get too hot. The Great Recession had complicated causes, but it revealed that people spent too much and saved too little.

The improving credit scores show that behavior has changed, though consumers are still in various phases of recovery. Millions turned to debt consolidation programs to help them dig out.

They combine all their monthly bills, and counselors at non-profit organizations work with lenders to reduce the overall interest rate. Clients also get ongoing financial advice and budget guidance.

So there’s help out there if you want to join the Credit Score Revival, certainly a lot more help than was available in “The Grapes of Wrath.”

Just remember the timeless lesson: If you control your debt, it can’t control you.