The pain caused by the effects of the Great Recession and the weak recovery have been felt by consumers and businesses alike. This pain, however, has led to some surprising results. It just may be the case that people can learn from their mistakes! New research shows that consumers are finally making progress in improving their overall financial condition. To put it simply they are getting smarter about money.
Equifax, one of the three main credit reporting agencies in the country, recently released its compendium of research related to consumer credit. The results are surprising. The average FICO score has improved to 695 during the recovery. The FICO score measures the credit worthiness of a consumer. A high FICO means that a consumer is more likely to pay back money that is lent to them. An increase to 695 is significant considering that the maximum score is 850.
This improvement in credit worthiness among consumers is due to a combination of factors. It isn't possible to correlate precisely the contributing factors to the precise point impact on a FICO score because the formula used to calculate FICO is secret. But we are able to identify the reasons that together led to the improvement.
First, the total amount of outstanding consumer credit has decreased. At the end of the recession consumers had a total of $12.4 trillion in consumer debt outstanding. Since October 2008 the total amount of consumer debt outstanding has fallen to $11.3 trillion, a reduction of almost 9 percent. Less debt outstanding is a good sign. Part of this reduction is due to consumers using more of their income and savings to pay down existing debt. That's great. Part of it though is due to banks and other financial institutions writing-off and forgiving debt because there is no realistic chance of repayment. That’s not such a good reason. But either way less debt means less financial pressure on a family.
A second reason for this improvement in financial condition is the setting in of the new reality mindset. A majority of consumers have now made saving—and not spending—their key financial priority. In a recent survey conducted by Experian, 52 percent of respondents indicated that they would further reduce their monthly spending due to the current economic conditions. This renewed emphasis on spending less also minimizes the pressure on a family's budget and leaves additional cash for paying down debt.
A third reason is the lack of access to new credit. For the most part banks are being quite strict when it comes to approving new consumer loans. By reducing access to new credit, consumers no long have the temptation of spending to the limit on a new card.
For businesses that sell to consumers, this is bittersweet news. It’s good news that consumers are focused on improving the quality of their financial condition and credit scores. In the long-term this means a larger pool of potential buyers with the means to pay for what they buy. But to achieve those long-term goals businesses will have a more difficult time getting consumers to part with their money in the short-term. Have you noticed a marked changed in how consumers evaluate buying decisions at your business? Let us know in the comments section.