The number of consumers with sub-prime credit scores is shrinking across the country, according to new data from Equifax. The total number of consumers with Equifax credit scores below 620 fell 2.1 percent, or by about 1 million consumers, in the third quarter of 2012 versus the third quarter of 2011. The overall share of consumers with Equifax credit scores under 620 fell by 0.7 percent (from 25.9 percent to 25.2 percent) during that same period.
The trend is playing out to varying degrees in different metropolitan areas, with Chicago seeing the largest decline in consumers with Equifax credit scores below 620. In the Chicago-Gary-Kenosha metro area, 1.5 million consumers had a credit score of 619 or below in the third quarter of 2012, a nine percent decline from the same quarter in 2011.
On the other end of the spectrum, Houston is the only metro area among the top 25 that had an increase in consumers with Equifax credit scores below 620, with a 0.6 percent increase in the number of consumers in the lowest category when compared to the same period in 2011. However, when accounting for population growth in Houston, the percentage of the Houston population with subprime credit scores fell by 0.5 percent.
Credit scores below 620 are considered sub-prime for the purposes of this report. A consumer with an Equifax score below 620 likely will have a harder time securing credit from a bank or other lender and may have to pay a higher interest rate if a loan is secured.
"Consumer credit scores are improving in most major metropolitan areas," said Trey Loughran, president of the Personal Solutions division at Equifax. "The job market is improving and time is starting to heal the wounds of the Great Recession."
The geographic differences can be attributed to a number of factors, including employment, population shifts and demographic changes. For instance, in Chicago, the unemployment rate declined 1.5 percentage points to 8.8 percent—the fifth best improvement in unemployment among the largest 25 metro areas. Also, there are significant improvements in early housing-bust markets such as San Francisco, Sacramento, San Diego, Los Angeles, Las Vegas, Phoenix and Miami, where people's credit scores are starting to recover after foreclosures.
"It is nice to see that over one million people across the country have moved out of the below 620 range," said Loughran. "We are seeing a trend of consumers being careful and disciplined about their use of existing credit while also being cautious about using new accounts they have opened."