25% in US Have Worst Credit Possible… Here’s the Silver Lining

Given the dismal state of US employment it’s no surprise that Americans are walking away from underwater mortgages and defaulting on consumer debts. These actions, though, are leaving a greater share of citizens in what is essentially the worst credit rating category possible, under 600 according to FICO. As of April, 25% of Americans are under this lowest threshold, an increase from 15% before the financial crisis struck.

Barry Ritholtz of The Picture Blog explains how this could be viewed as a good development:

“Some people will lament this, but it has a silver lining. Deleveraging is certainly a good thing, and forcing consumers off of the credit treadmill may actually help these folks over the long haul.

“The repercussions of the credit weakening means softer growth as the broader economy moves to a more sustainable basis of spending. Some people complain that unemployment insurance makes people lazy; I disagree — at least so long as there are 5 or 6 unemployed people for each job opening.

“But I am going to posture that easy credit allowed some people borrow to maintain a lifestyle, rather than earning to maintain a lifestyle.”

Essentially, the upside of the downward credit trend is that consumers will start budgeting for purchases from the perspective of what they can actually afford. This outlook, as opposed to buying whatever a credit card allows, may slow growth, but also provides a more sound foundation for the US economy as a whole.

You can read more details in The Big Picture coverage of how 25% of Americans have bad credit scores.


Rocky Vega,
The Daily Reckoning