A widening chasm in the U.S. consumer economy is pushing banks to focus on a growing cohort of "super-prime" borrowers, leaving households with weaker credit to face tightening conditions and mounting debt.
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US Credit Market Splits as 15M Join Super-Prime Ranks
A widening chasm in the U.S. consumer economy is pushing banks to focus on a growing cohort of "super-prime" borrowers, leaving households with weaker credit to face tightening conditions and mounting debt.
The number of Americans holding top-tier credit scores has swelled by 15 million in six years, creating a sharp divide in the consumer landscape that is reshaping bank strategy and concentrating risk at the lower end of the credit spectrum.
"The U.S. consumer remains resilient in the aggregate but increasingly bifurcated beneath the surface,” Charles Scharf, CEO of Wells Fargo, said in an earnings call.
More than 41% of consumers had super-prime scores (above 780) in the first quarter, up from 37% six years prior, according to TransUnion data. This contrasts sharply with record-high credit card debt, which now exceeds $1.3 trillion, and rising delinquencies in auto loans.
This bifurcation presents a critical challenge for lenders and the broader economy. As banks like Citigroup and American Express pivot to serve the burgeoning super-prime market with premium products, they risk creating a feedback loop where subprime borrowers find it increasingly difficult and expensive to access credit, potentially amplifying the next economic downturn.
The Super-Prime Surge
The growth in top-tier credit holders is being driven significantly by younger consumers. Gen Z and millennials are now the leading source of new account acquisition for companies like American Express, which noted that most of its new accounts were for premium, fee-paying cards. This cohort has benefited from rising incomes and surging asset values, allowing them to build strong credit profiles early.
This has been a boon for banks focusing on high-end customers. Citigroup, for instance, reported that approximately 85% of its balances are extended to consumers with a FICO score of 660 or higher. Lenders are rewarding these customers with larger credit lines; since the third quarter of 2019, average credit limits for new cards have increased 11% for super-prime consumers, compared to just 5% for near-prime borrowers, according to TransUnion.
Stress at the Bottom
While the share of consumers with subprime credit scores has remained flat, signs of stress are accumulating. Total auto loan debt has climbed to $1.68 trillion, with delinquencies reaching 4.8% at the end of December, according to a New York Fed report. In a sign of potential desperation for volume, the median credit score for new auto loans recently fell 8 points in a single quarter to 716.
This growing distress among lower-tier borrowers, coupled with the record $1.3 trillion in credit card debt, highlights the precarious position of a significant portion of the population. While the super-prime segment thrives, the financial health of subprime and near-prime consumers is deteriorating, posing a systemic risk that is being closely watched by regulators and financial institutions.
This article is for informational purposes only and does not constitute investment advice.
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