Unemployment Thins Out Pool of High Risk Borrowers

14 September, 2010

There is a direct correlation between bankruptcy and joblessness. Unemployed people have less money and in turn are less able to meet their financial obligations. The correlation between no job and no money makes perfect sense. For the last few years the relationship between unemployment and declining credit card statistics has proven steady. Interestingly the research in recent month’s show that credit card statistics are improving, less people are defaulting on their credit card loans despite the still high unemployment rates in the country.

Making Sense of the Numbers

The past two years have seen much higher than average unemployment rates, surging personal bankruptcies and more and more average Americans unable to pay off their credit card balances. The alarmingly high rate at which people were defaulting on loans and the high incidents of bankruptcy could be attributed to job loss and overall economic hardship but the latest economic data is starting to indicate that despite the unemployment rate, consumers are defaulting far less on their credit card balances and card issuers are reporting far fewer consumer defaults.

There are a number of reasons why this may be true. As the recession begins to turn around things appear to be changing, slowly but surely. The following is a list of reasons why card issuers are reporting decidedly improved financial statistics on their cardholders in recent months:

• People who can afford to spend are less afraid to do so than they were a year ago. Those that are able to afford to use credit and pay off the balance more than likely doing so and are put in a category of low risk.

• The credit card act was passed in the early part of 2010. This created regulations that have evened out the playing field between borrows and lenders improving the overall credit card industry and reduced incidents of defaults.

• Credit cards are more selective with the approval process for new cardholders. Lower risk borrowers are often responsible payers, leading to much improved statistics for the credit card companies.

• Cardholders in general have become more responsible with using and paying off credit card balances because they fear that the economy is still unstable and don’t want to risk getting into debt.

• People who once had multiple cards have canceled some of these to reduce their spending risk.

• Unemployment limits the overall number of people with credit because it thins out the pool of high risk borrowers, reducing the absolute number of total delinquencies and defaults.

The Biggest Reason for the Improvement

The biggest reason for the improved statistics, which is much less evident than many of the other more obvious reasons is that between the economy, unemployment and the card industry in general, those that were unable to pay off their outstanding balances have long since been weeded out of the system. This painful process of weeding out the dead weight in the system has dramatically trimmed the losses and improves the overall statistics. People that have filed for bankruptcy are no longer included in the statistical count. Those that showed up in last years statistics showing delinquencies that later turned into bankruptcies have been excluded from the recent statistical data.

Unemployed people have very limited access to credit as do high risk borrowers, effectively eliminating them from the credit pool. Those that fell victim to deep credit card debt and filed bankruptcy have been written off as a loss and taken out of the statistical data counting those who are most credit worthy. Filing bankruptcy puts you into the candidate “loss” pool of credit risk when the statistics are compiled that report on the status of credit card loans.

It seems that credit card statistics may be improving simply because a majority of those that were once considered high risk are no longer part of the credit pool.

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