It’s tough living on the lower end of the credit score scale. If you have a credit score below 640 or so, you are generally given “subprime” lending offers for any form of credit that you request. From credit cards to auto loans and mortgages, you will be hit with higher interest rates and potentially other restrictions and fees.
According to credit bureau TransUnion’s Q2 2017 Industry Insights Report, you now have another problem to deal with – difficulty in getting credit at all.
TransUnion found that overall originations for subprime consumer credit have dropped sharply over the past four quarters. Total subprime originations dropped from a post-crisis peak of just under 6 million consumers in Q2 2016 to just under 4.6 million in Q1 2017. The last two quarters represent the first consecutive year-over-year decreases in overall subprime originations in the TransUnion data set beginning in Q3 2009.
Personal loans and credit card originations are leading the decline, with drops over the last three quarters of one-third and one-quarter, respectively. Auto loan originations are an exception – they are still down year-over-year, but are showing the traditional sawtooth pattern of fourth-quarter drops followed by three improved quarters.
From the lender’s perspective, this is reasonable. Lenders must assess the likelihood of repayment, and a poor credit score and checkered credit history lead to a greater risk of default.
As the economy recovered, lenders began to stretch the credit boundaries again in order to gain business in a competitive banking environment. Based on the TransUnion report, it appears that the collective risks of subprime loans have banks restricting credit to avoid reaching crisis territory.
For perspective, consider that after the housing crisis and subsequent Great Recession, overall subprime loan originations dropped to just under 2 million in Q1 2010. In just 25 quarters, the overall subprime origination volume tripled. Credit tightening is a logical consequence of increased subprime credit volume.
From a macroeconomic standpoint, this is a normal and healthy turndown in lending. When default rates are rising (as they have been in some subprime lending segments) and the combination of default rate percentage and total subprime loans outstanding becomes too great, banks should be tightening credit applications a bit. Too many consumers are overextending themselves with credit lines that they can’t manage.
From your microeconomic viewpoint, this is terrible news. When you’ve been laid off, bills are rising, and your car is littering the freeway with parts, you are not interested in the long-term health of the economy. You are laser-focused on getting the credit you need.
What’s a subprime consumer supposed to do? The best thing to do is to avoid becoming one. Keep a regular eye on your credit score and your spending to stay in the good credit range. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
If you’re already at the subprime level, we recommend taking all the steps you can to get out of that neighborhood. Recognize that you’re in a hole, and stop digging. Resist the urge to resort to payday loans and other extremely high-interest alternatives. It’s difficult, but essential, to focus on longer-term goals.
Reduce your spending to levels that allow you to pay all monthly bills on time and in full, and follow through with on-time payments. Next, once you have a feel for cutting expenses, reduce spending further to start creating a surplus for chopping down debt. In the meantime, look for any ways to boost your income (a second part-time job, selling items you don’t need or use, etc.).
It takes time to climb up from subprime loan territory, and the trip is not at all easy – but it is very satisfying when you arrive at the plateau of good credit. Just don’t celebrate so much that you end up back in the same debt cycle.
If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.
Photo ©iStockphoto.com/pixsooz