Image: Female hands cutting credit card © Corbis

Michael Busick, a Charlotte, N.C., math teacher, says his credit union "was shocked" to discover his credit score was 812 out of a possible 850 when he applied for a $19,500 new-car loan. The loan officer told him he rarely saw scores so close to perfect, says Busick, 33, who added he pays bills on time and doesn't overextend. He got the loan.

The average U.S. credit score -- a predictor of the likelihood that lenders will be paid back -- rose to 696 in May, the highest in at least four years, according to credit-reporting bureau Equifax. Delinquencies on consumer loans have dropped 30% in two years, according to Federal Reserve data. (Do you know your credit score? Take this quiz for a free estimate.)

Improving credit quality gives households the ability to spend more. A rebound in spending would belie Morgan Stanley economist Stephen Roach's claim that consumers will be "zombies" for years because they are saddled with too much debt.

"The financial situation of the household sector has improved far faster than everyone thought it would two years ago," says James W. Paulsen, the chief investment strategist for Wells Capital Management in Minneapolis. "People are still locked into the view that consumers are facing record burdens, and they are not."

U.S. consumers have reduced debt by more than $1 trillion in the 10 quarters ended in March, according to the Federal Reserve Bank of New York. Households spent 16.4% of their earnings on debt payments in the first quarter, including lease and rental payments, homeowners insurance and property taxes. That's down from 18.9% in the third quarter of 2007, before the recession started.

Even consumers in trouble are in better shape, says Mark Cole, the chief operating officer for Atlanta's CredAbility, a nonprofit provider of credit counseling. Clients have an average of $19,500 in unsecured debt this year, down 30% from 2009 and the lowest in at least six years, he says. "We really see credit quality increasing."

Credit card companies notice the rebound, too. Discover's rate of 30-day delinquencies was 2.79% in the second quarter, the lowest in its 25-year history, company officials said in June.

Jennifer Lahotski, 28, who has a marketing job in Los Angeles, says she's been improving her credit since 2007, when her score was "absolutely below 660," the number Equifax says is the minimum needed to qualify for prime consumer loans. The Penn State graduate had been late on some bills and even had an old charge of $5 from a gym.

"I went through each expense, each delinquency, and sent them a check," she says. "I turned myself into a hermit for six months, but I did it," eliminating most restaurant meals and "random Target runs where you come out with $50" of merchandise. Lahotski, who has a Visa and an American Express card and $15,000 in student loans, says she is now saving "a few hundred a month," with plans to buy a house when she can afford a down payment. (How long will it take to pay off your credit cards? Find out with MSN Money's calculator.)

While household obligations are at a 17-year low because of increased savings and lower interest rates, Roach, the nonexecutive chairman of Morgan Stanley Asia, calculates that household debt still comes to 115% of income, compared with a 75% average from 1970 to 2000. "We need to encourage balance-sheet repair and adjustment by overly indebted, savings-short consumers," he says.

Roach's view is supported by some economists, who say the debt that fueled the housing boom from 2002 to 2006 will take years to unwind. This deleveraging "is pernicious, it's ongoing and it's holding back growth because people are going to save more and spend less," says Kevin Logan, the chief U.S. economist at HSBC Securities in New York.

Yet other economists see something more nuanced happening: Some consumers are still paying down debt, while others feel financially healthy enough to borrow. A small percentage of senior loan officers reported growth for all consumer lending in the first quarter. That was the first increase since 2005, according to a quarterly Fed survey released in May. About 29% of the loan officers interviewed were more willing to make consumer-installment loans. In the second quarter, loan officers reported a pickup in demand for auto loans.

Dean Maki, the chief U.S. economist at Barclays Capital, says the growth in credit reflects an underlying optimism. As a Fed economist in 2000, he published research that concluded "high debt burdens are not a negative force." He adds, "When consumer credit is growing, it is a sign that households have become more confident about income prospects."

Sometimes that confidence is horribly misplaced, as in the years leading up to the crash. Fortunately, the actual increases in consumer credit today are very modest.

The return to borrowing by some consumers is already benefiting companies. Craig Kennison, an analyst at Robert W. Baird & Co. in Milwaukee, predicts lending profits will rise at CarMax, the largest U.S. seller of used cars, and Harley-Davidson. Their finance arms "have fully recovered," says Kennison.

The shares of credit card and banking companies will benefit, too, says analyst Brian Foran of Nomura Securities International. "Consumers spend money based on their cash flows," he says. "And their cash flows are fine."

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Math teacher Busick, who has a home loan and four credit cards, estimates his near-perfect credit score has risen from the upper 700s in the past few years. While he uses an American Express card to accumulate frequent flier miles on Delta Air Lines, he pays it off in full most months. "I don't have late payments," he says. "I pay all my bills on time." Virtue has its rewards.

Now Busick is thinking of buying a Sony television or a Dell or Hewlett-Packard computer that could cost $2,000. "If I want something, I will get it," he says.

This article was reported by Steve Mathews for Bloomberg Businessweek.