Consumers are increasingly relying on credit cards to make ends meet, but it hasn’t had a major impact on their financial situation — at least as far as their credit score goes.
The national median credit score is at an all-time high of 716, flat from last year, according to a new report from FICO, the developer of one of the most widely used scores by lenders. FICO scores range from 300 to 850.
However, according to Ethan Dornhelm, FICO’s vice president of scores and predictive analytics, this is the first time since the Great Recession that scores have not improved from year to year.
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“We’re getting back to pre-pandemic norms, which in and of itself isn’t a red flag,” he said, despite “this slight deterioration in debt levels.”
“What we are keeping an eye on is whether there is further deterioration.”
Results were stable as consumers took on more debt
As prices soared across the board, there is no doubt that American debt has fallen lower.
And yet, despite the dramatic increase in the cost of living, credit scores have held steady, leading to more consumer reliance on credit, credit card balances soaring, and delinquencies rising.
In April 2022, the average credit card utilization was just over 31%, up from 29.6% a year earlier.
Your utilization rate (the ratio of debt to total credit) is one of many factors that can affect your score. Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the impact that high balances can have.
“We are closely monitoring what the next six months will bring,” said Dornhelm.
Many factors are at play, he added, including inflation, jobs and housing, and the withdrawal of government stimulus programs from the Covid-era, including President Joe Biden’s recent announcement that most federal student loans are on hold would be extended “one last time” to December 31st.
What number constitutes a “good” credit rating?
In general, the higher your credit rating, the better you are at lending. You’re more likely to be approved, period, and you may qualify for a lower interest rate.
A good score is generally above 670, a very good score is above 740, and anything above 800 is considered exceptional.
An average score of 716 on FICO measurements means most lenders rate your credit as “good” and are more likely to offer lower interest rates.
During the housing crisis more than a decade ago, when there was a sharp rise in foreclosures, the average nationwide credit score bottomed at 686. They ticked steadily higher up until the pandemic, when government stimulus programs and a surge in household savings helped propel the scores to an all-time high of 713.
Differences in creditworthiness still exist for minorities
But these uptrends are not universal.
According to a separate analysis by the Urban Institute, young adults in majority Black and majority Hispanic communities have lower average credit scores than their white counterparts. And their credit ratings are more likely to deteriorate over time.
From 2010 through 2021, about a third, or 33%, of 18- to 29-year-olds in majority-Black communities and more than a quarter, or 26%, in majority-Hispanic communities saw their credit score decline, compared to just 21% of those in majority-white communities.
Between the ages of 25 and 29, young adults in majority-Black communities have a median credit score of 582, just above the range considered poor, compared to those in majority-Hispanic communities, who have a median score of 644, and those in the Majority-white communities, which have a median score of 687, the report found.
“These credit discrepancies are rooted in decades of discriminatory policies that have denied communities of color equal access to affordable financial services and wealth-building opportunities,” the Urban Institute said.
At the same time, the scores have helped “democratize credit and allow consumers to qualify for credit quickly and fairly, compared to days before when underwriting was more biased,” noted FICO’s Dornhelm.
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