NEW YORK (MainStreet) — The nation's consumers are doing a better job strengthening their credit scores, and that's a sign of a stronger economy, experts say. According to Experian's fifth annual State of Credit study, the national average consumer credit score is 664 to 666 (based on the Vantage credit score benchmark index).
The highest scores — for reasons that are not explained — come from residents of Minnesota, North Dakota and Wisconsin, according to Experian. The lowest scores are in warm weather states including Mississippi, California, Georgia and Texas.
Whatever the reason, congratulations to those already shivering.
The higher a consumer's credit score, the better deals that consumer gets on such things as mortgage loans, auto loans and credit card rates. A consumer with a 700 credit score may get a 3% rate on a $15,000 car loan (based on a payoff timeline of 48 months), for instance. The monthly payoff, with no money down, would be $332.01.
A consumer with subpar credit may face a higher interest rate from an auto lender who views the consumer as a higher credit risk, and therefore deserving of a higher interest rate to cover the lender's perceived risk. Consequently, a consumer with a 600 credit score may see an interest rate of 6% on the exact same loan and face higher monthly payments ($352.26) and higher overall payoff payment on the total amount owed.
That "rate risk gap" between consumers with higher and lower credit scores can also translate into higher payments on credit cards and mortgage loans.
These days, consumers seem to be feeling confident enough to open up more bank cards — one in 17 consumer opened a bank card account this year, compared with one in 22 during the same quarter last year. Experian also says retail credit card use is up 6.7% (good news for retailers heading into the holiday shopping season), although average consumer debt is up by 2.3% (to an average of $28,496 per U.S. adult) and mortgage lending is down.
It all adds up to a more robust year for consumer credit and a potentially brighter 2015. "This has been a notable year for borrowing, with more new credit being extended and consumers feeling more comfortable and confident about accepting those credit offers," says Michele Raneri, vice president of analytics at Experian. "Even with some categories like mortgage taking longer to bounce back, an early glimpse at our third-quarter data indicates that an upward trend may be on the horizon."
— By Brian O'Connell for MainStreet