According to multiple reports, consumer borrowing increased in December 2010, signaling a possible end to the worst days of non-existent credit.
Debt incurred across multiple credit product types was strong and it wasn’t just “seasonal.” Here’s why, according to John Ulzheimer:
1. Credit card issuers are becoming more aggressive with their offers
They’re digging deeper into the credit pool where more profitable customers exist. This means consumers with FICO scores below 700 are being welcomed back by some lenders.
2. Credit card issuers are now fully compliant with the CARD Act and understand the cost of said compliance
They’ve been able to “move pieces around the board” and implement new fees to cover their compliance costs. The removal of the “unknown” cost of compliance means credit card issuers are more comfortable taking on more risk.
3. CARD Act not as bad for credit card issuers as originally thought
Universal Default is still allowed on new purchases, interest rate increases are not impossible, Rates aren’t capped, fees aren’t illegal and the card issuer’s ability to manage risk in a nimble way has not been eliminated. As such, credit card issuers will now allow more profitable high risk borrowers back on the books.
4. Reports of the consumer credit “epiphany” have been greatly exaggerated
Wanting to stay out of debt is very different than actually doing it. Consumers have been forced into using debit cards instead of credit cards despite the less attractive nature of debit cards. The December numbers are proof that we’d rather use credit cards than debit cards, if we’re given a choice.
5. Credit didn’t expand in 2008 or 2009
Although the increase occurred during the busiest shopping time of the year (December), it’s the first positive December since December 2007. This means the increase can’t be attributed completely to “seasonal shopping.”
5. The Bottom Line
We know that the demand for credit has outpaced the supply for the past 24 months. This signals a better balance and a welcome beginning of the end of the credit crunch, especially for low risk borrowers.
John Ulzheimer is the President of Consumer Education for SmartCredit.com, Credit Contributor for Mint.com and the author of the book “You’re Nothing But A Number.” He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.
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