The share of U.S. consumers with subprime credit scores reached its lowest level in nearly a decade, signaling good news for the nation’s economy since the new wave of credit-worthy Americans could help boost bank lending.
The number of Americans with low credit scores, or so-called subprime scores, have been falling for six consecutive years after peaking in 2010 during the financial crisis. The total share of subprime adults fell to 20.7% in April, according to the Wall Street Journal. The data comes from the Fair Isaac Corp., or FICO, and has been tracked since 2005. A subprime borrower is defined as someone with a credit score between 300 and 599 on a scale that goes up to 850.
More Americans with better credit ratings means there are more worthy consumers that banks can court. Following the financial crisis when mortgages and other debts went unpaid, banks tightened their lending standards and shunned most subprime borrowers. That meant a smaller customer base available for loans, thus squeezing bank profits. Now, with more consumers crawling out of subprime levels, banks have a larger customer base available without the need to lower their lending standards.
More loans often translate into more consumer spending. The first loans expected to pick up volume are credit cards and auto lending, Morgan Whitacre, consumer client underwriting executive at Bank of America (BAC), told the Journal. Given formerly subprime borrowers’ restricted access to loans, the new windfall is expected to translate into higher short-term consumer spending since shoppers won’t have to depend only on their cash-on-hand. That’s especially good news for automakers and other big-ticket retailers.
Several factors are helping reduce the number of subprime borrowers. As the financial crisis fades, the missed mortgage payments and other financial sins are starting to drop off peoples’ credit records. More Americans are also working again—the unemployment rate, currently 4.7%, is well below the 10% peak in late 2009. And the past years of super-low interest rates have helped everyone pay off loans so borrowers’ payments account for a lower share of disposable income.