People who work in the financial sector often counsel consumers that they need to pay attention to their credit scores and make sure that the number does not get too low, or else no lending institutions will approve them for loans.
A borrower's credit score is a numerical value that gives a lender an idea of the likelihood that the borrower will repay a loan. Many things factor into a credit score, including the borrower's past payment history on his or her credit report, the amount of money that a borrower owes to other lenders, how long a borrower's credit history is, the type of credit a borrower has, and the number of new credit inquiries a borrower has made.
The average consumer credit score rose to 696 in May 2011, which is the highest the average has been since 2006, according to a report from Equifax, Inc., one of the three major credit score providers in the U.S. Data from the Federal Reserve revealed that the ratio of consumer debt payments to income reached its lowest point since 1994 and payment delinquencies have dropped 30 percent in the last two years.
Reasons for Credit Score Improvement
One of the reasons that credit scores have improved so dramatically is that consumers have deleveraged themselves. The Federal Reserve Bank of New York reported that U.S. consumers erased $1 trillion in debt during the past 10 quarters ending in March 2011. Household debt is at a 17-year low due to people saving more and continued low interest rates. Federal Reserve figures also show that households spent an average of 16.4 percent of income on paying debt in the first quarter of 2011.
Another factor contributing to the improvement in the average national credit score is fewer consumers are defaulting on payments. Data from Bloomberg showed that the nationwide default rate dropped to 3.09 percent in May 2011 - the lowest it has been since 2007.
Impact on People Filing for Bankruptcy
Rising consumer credit scores have made lenders more willing to give loans. A quarterly Federal Reserve survey showed that 29 percent of lenders were more willing to make loans, which is the highest rate since 1994. For those filing bankruptcy, this could mean that it is easier to obtain housing and auto loans after the final discharge of the bankruptcy process eliminates a large portion of their debt.
Additionally, filing bankruptcy can actually improve a person's credit score within 12 months of filing if the person makes timely payments on his or her debts from there on out. Each late payment that a person makes to creditors lowers his or her credit score every month; by declaring bankruptcy and eliminating the multiple late payments, a person can begin to rebuild his or her credit.
As the national average credit score rises, lenders are seeing less risk in making new loans and are more inclined to do so. With lenders more willing to make loans now, it may be easier for those filing bankruptcy to obtain credit in the future.
