Although consumers are depending more on credit cards to get by, this hasn’t had a substantial influence on their financial situation, at least in terms of their credit rating.
A new report from FICO, the company that created one of the credit scores that lenders most frequently use, shows that the average credit score in the country is at an all-time high of 716 and has been constant over the past year. The range of FICO scores is 300 to 850.
However, according to Ethan Dornhelm, vice president of scoring and predictive analytics at FICO, this is the first time since the Great Recession that scores have not increased year over year.
“We are leveling off back to pre-pandemic norms which is, in and of itself, not a red flag,” he stated, regardless “this slight deterioration of debt levels.”
“What we’re keeping an eye on is if there’s continued deterioration.”
Scores stayed the same as consumers increased their debt
There’s no denying that Americans’ debt levels have increased as prices have increased generally.
Despite the huge increase in the cost of living, which has led to more customers relying on credit, rising credit card balances, and an increase in late payments, credit scores have remained stable.
The average credit card utilization increased from 29.6% in April 2021 to little over 31% in April 2022.
One of the many variables that might affect your score is your utilization rate, or the proportion of debt to total credit. To reduce the impact that high balances can have, credit experts typically advise borrowers to keep revolving debt below 30% of their available credit.
“We are closely monitoring what the next six months will bring,” Dornhelm said.
The president’s recent announcement that the payment pause on the majority of federal student loans would be extended “one final time” through December 31 is just one of many factors at play, he continued, including inflation, the jobs market, housing, and the rollback of government stimulus programs from the Covid era.
What value constitutes a “good” credit score?
In general, the better off you are when applying for a loan, the higher your credit score. You have a better chance of getting authorized, and if you do, you might be able to get a better deal on the interest rate.
A good score is often one that is over 670, a very excellent score is one that is over 740, and anything beyond 800 is thought to be remarkable.
Most lenders will view your creditworthiness as “good” and are more likely to provide cheaper rates if you have an average FICO score of 716.
During the housing crisis more than ten years ago, when there was a substantial rise in foreclosures, average credit scores countrywide peaked at 686. Prior to the pandemic, they gradually increased until a surge in household saving and government stimulus measures allowed scores to reach an all-time high of 713.
There are still differences in credit scores for minorities
However, not all areas are experiencing these growing tendencies.
According to a separate Urban Institute investigation using Vantage scores, young adults in communities with a majority of Black and Hispanic people have lower average credit scores than their white counterparts. They also have a higher chance of experiencing a gradual decline in their credit ratings.
A third of 18 to 29-year-olds, or 33%, in predominantly Black and more than a quarter, or 26%, in predominantly Hispanic neighborhoods, as opposed to just 21% of those in primarily white regions, saw a fall in their credit ratings between 2010 and 2021.
According to the study, young adults between the ages of 25 and 29 in majority-Black communities have a median credit score of 582, which is barely above the range considered poor. By contrast, young adults in majority-Hispanic communities have a median score of 644, and young adults in majority-white communities have a median score of 687.
“These credit disparities are rooted in decades of discriminatory policies that have denied communities of color equal access to affordable financial services and wealth-building opportunities,” stated the Urban Institute.
Additionally, according to Dornhelm of FICO, credit scores have helped “democratize credit and enabled consumers to qualify for credit in a fast and fair fashion compared to the days prior when underwriting was more subjective to biases.”