The average American’s credit score is 716 according to FICO, the company that created the most widely used credit scoring formula. FICO releases this data every six months, and it’s the third time in a row that the average credit score is 716.
Prior to this plateau, there had been a consistent upward trend. The average credit score has not fallen in any of these semi-annual updates since October 2013. It fell from 690 at the end of 2013 to 700 at the beginning of 2017. Then it really took off at the start of the COVID-19 pandemic, jumping from five points from 708 in April 2020 to 713 in October 2020. This was the largest six-month improvement in the data set, dating back to 2005. The average rose another three points over the six months following ones and has remained there unchanged ever since.
Why credit scores have gone up in recent years
The past decade has been characterized by relatively low unemployment and low interest rates, both of which have helped Americans adopt healthy credit behaviors, such as paying their bills on time.
The improvements in 2020 and early 2021 can largely be attributed to the three rounds of stimulus payments the federal government issued to most Americans in an effort to offset the economic disruptions associated with the pandemic. Many people have used some or all of these funds to pay off credit card debt and other bills. Other government aid included expanded unemployment benefits and a larger child tax credit.
There are also other explanations, of course. Federal student loan payments have been suspended since the start of 2020, avoiding defaults and freeing up money for other things. Mortgage forbearance has also been widely available and, on a smaller scale, lenders have granted accommodations to some credit card and car loan borrowers.
There’s also the fact that many people spent less in 2020 and 2021 as the pandemic reduced travel, dining, and many types of out-of-home entertainment. A strong housing market has provided most homeowners with large equity stakes, and the stock market has performed very well for much of 2020 and 2021. The labor market has also been robust; the unemployment rate fell rapidly after the initial COVID-induced spike and recently hit a 50-year low on several occasions. These indicators do not directly affect credit scores, but they do illustrate the improvement in the state of finances for many Americans, at least for a while.
Positive financial trends reversed in 2022
This year, inflation hit 40-year highs, interest rates rose sharply, the stimulus spigot dried up, and gross domestic product fell in each of the first two quarters. With that as a backdrop, it’s actually remarkable that the average credit score has remained stable.
We’re starting to see delinquencies rise on credit cards, auto loans, and other financial products. They are not yet at worrying levels, but they are not as remarkably low as they have been for the past two years. In April 2022, FICO reported that 15% of the population had missed a payment due date by at least 30 days in the past year, up one percentage point from April 2021 Payment history is the most weighted factor in the FICO scoring formula.
The second largest category is how much you owe, and that has also increased. Total consumer debt increased by about 8% between the second quarter of 2021 and the second quarter of 2022, according to the New York Fed. Credit card balances jumped 13% during that period, the biggest year-over-year expansion since the report was first created more than two decades ago. FICO says the average credit utilization rate is slightly higher at 31%, up from 29.6% a year ago, but up from 33% in April 2020.
Another key factor is when you applied for credit. Doing it too often can make you look desperate or risky to the credit bureaus. Account creations are back to pre-pandemic levels; 47.5% of American adults opened a new account in the past year, up from 47.3% in April 2020 and 44.8% in April 2021.
The K-shaped economy
The pandemic appears to have exacerbated the trend of income inequality. Economists call this the K-shaped recovery – part of the “K” moves up and to the right, indicating improvement over time, while another part moves down and to the right . In other words, over time the rich get richer and the poor get poorer.
“There are millions of consumers who are currently facing financial hardship,” says the FICO report. “About 20% of the FICO-assessed population experienced a decline of at least 20 points between April 2021 and April 2022. This represents an increase from the 17% previously seen between April 2020 and April 2021. For many of these consumers , this decline was likely driven by the reverse of the trends that drove the national average FICO score up in the first year of the pandemic: slowing economic growth, soaring inflation, falling interest rates household savings and the expiration of government stimulus programs at the end of 2021.”
Although your income is not explicitly included in your credit score, the underlying trends do overlap. The less money you have, the more difficult it is to complete the tasks that contribute to a good credit score (paying bills on time, keeping debts low, etc.).
Credit score improvements in 2020 and 2021 were greatest among the most vulnerable (those with the lowest credit scores), and now the trend is going the other way. As FICO puts it:
“In 2020, the average FICO score increased especially for consumers with FICO scores between 550 and 699. For example, consumers with FICO scores between 550 and 599 saw their score increase by up to 20 points from April 2020 to April 2021. In contrast, the rise in the average FICO score by the same FICO score bands was much more moderate in the second year of the pandemic.Consumers whose FICO scores were between 550 and 599 in April 2021 saw their average score increase by 7 points over the year, on par with the increase seen during the pre-pandemic period from April 2019 to April 2020.”
This credit score range of 550 to 699 straddles the lines from bad to fair to good. The full FICO range is 300 to 850. Often the threshold between subprime credit and prime credit (sometimes described as the boundary between fair and good credit) is somewhere between 660 and 680. Below that it becomes increasingly difficult to obtain loans and lines of credit. And if you’re approved, you’ll likely pay a much higher interest rate.
The bottom line
In 2020 and 2021, stimulus payments and pandemic-era accommodations have helped improve Americans’ credit scores. This was especially true among those who started the period with lower scores. Since then, the trend has stabilized. With a significant risk of recession over the next year, it will come as no surprise that the average American’s credit rating will drop in the near future. This could be particularly pronounced at the lower end of the spectrum.
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