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Subprime borrowers at lowest number since 2005

July 1, 2016
The percentage of Americans with subprime credit scores has fallen to the lowest level in more than a decade, a development that could give bank lending and the overall economy a boost.
The share of U.S. adults with credit scores that are considered "subprime" fell to 20.7 percent in April, the sixth consecutive year-over-year decline and the lowest level since at least 2005, when Fair Isaac Corp., or FICO, started tracking the data. The ranks of subprime borrowers swelled during the financial crisis, peaking at 25.5 percent in 2010, as mortgage payments, credit-card bills and other debts went unpaid.
The improving trend could bring relief to big banks, which tightened credit standards in the wake of the crisis. An increase in more-creditworthy borrowers could allow them to increase lending without lowering standards. Banks are desperate for revenue growth since the same low rates helping customers are also squeezing their own profits.
"It will have a positive impact on loan volume, loan growth and revenue," Morgan Whitacre, a consumer client underwriting executive at Bank of America Corp., said. Credit card and auto lending would be the first areas to benefit.
That, in turn, could bolster consumer spending and the U.S. economy. As more people gain access to credit, consumer spending in the short term should rise, said Rob Martin, U.S. economist at Barclays PLC. "It frees people from having to spend only the cash they have on hand," he said.
"It’s good for the economy in the sense that there’s a lot less risk in the credit that’s extended," Martin added.
Already, consumers are starting to borrow more again. Auto-loan balances surpassed $1 trillion for the first time ever this year, according to credit-reporting firm Experian. Credit card debt is on pace to hit $1 trillion this year, and student-loan debt continues to swell.