Is Another Credit Bubble on the Horizon?

Nobody wants to believe it, but we may be on the cusp of yet another credit bubble in the United States. Consider that credit reporting agencies have confirmed that the average American credit score hit an all-time high in April 2017. However, the problem comes with the increasing levels of consumer debt that are now evident in the economy. This has several financial analysts concerned that we may be heading down the wrong path. According to tracking experts at Fair Isaac Corporation, the April average of US credit scores was 700.

One of the burgeoning problems in the United States is student debt. Consider that student debt comprised just 5% of total household debtin Q3 2008, and now accounts for 11% of the overall debt burden. The total student debt in the US now makes up $1.3 trillion of total debt in the economy. Unfortunately for many students, college degrees are not guarantees of improved livelihoods. They are guarantees of significant debt burdens that need to be repaid. Many consumers are steadily turning to personal loans to finance their debt obligations, and consolidate their credit card debts.

Credit Scores Indicate Lending Growth and Increased Optimism

There are multiple credit scoring metrics used to determine poor, average, and good credit. These credit scoring systems typically use a sliding scale which ranges between 300 on the low end and 850 on the high-end. FICO and VantageScores subscribe to this model. On this paradigm, a bad credit score is considered below 550, a poor credit score between 550 and 649, a fair credit score between 650 and 699, a good credit score between 700 and 749, and an excellent credit score is represented by figure over 750.

Since the global financial crisis in 2009, Americans have steadily been rebuilding their credit, and borrowing more. This indicates that banks are feeling more confident about their customers and customers are responsibly using their credit. A growth in credit utilization and provision is not necessarily a negative for the economy. It indicates increased confidence among banks and financial institutions.

Sharp Uptick in Household Debt

According to the metrics, the number of consumers with a credit score of less than 600 is less than 40 million. This comprises an estimated 20% of all US customers with a FICO score. 7 years ago, the number of US consumers with a credit score below 600 was 25.5%. The New York Times recently reported that household debt is steadily increasing in the United States. The total consumer debt balance at the end of Q1 2017 was $12.73 trillion. In Q3 2008 the total consumer debt balance was $12.68 trillion.

The latest statistics indicate that the bulk of consumer debt (71.4%) is made up of housing mortgages, and/or home equity loans. 6% is credit cards, 9.2% automobile loans and 10.6% student loans. There has been a marked decrease in housing-related credit since 2009, but all other components of consumer debt have remained steady. The mortgage market is valued at $8.6 trillion, and it certainly has the capacity to spark off another financial crisis.

Delinquency Rates Rising

While household debt may be increasing, analysts do not appear to be concerned about a new housing bubble. The main issue relates to student loan debt and automobile debt which combined are worth $2.5 trillion. The composition of the average American’s debt is vastly different to the profile a decade ago. Credit cards are now more prominent features while mortgages are less so. The fact that overall debt is $50 billion higher than Q3 2008 is concerning, and it brings into question the overall indebtedness of the US consumer.

Consumer expenditure only increased by 0.6% in Q1 2017, indicating that a slowdown in overall activity is taking place. An equally concerning statistic is the delinquency rate on credit cards for Q1 2017 which is now at 2.42%. This is the highest level in 4 years. With the unemployment rate currently at 4.3%, and debt levels rising, one has to question whether a ballooning crisis is on the horizon. With near full employment, it is a little disingenuous that delinquencies on credit repayments are taking place.