Credit ratings are at an all-time high, despite rising consumer debt

Consumers increasingly rely on credit card to make ends meet, but it hasn’t had a significant impact on their financial situation, at least as far as their credit rating is concerned.

The national average credit score sits at a record high of 716, unchanged from a year ago, according to a new report from FICO, developer of one of the scores most widely used by lenders. FICO scores range from 300 to 850.

However, this is the first time since the Great Recession that scores have not improved year over year, according to Ethan Dornhelm, vice president of scores and predictive analytics at FICO.

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“We are stabilizing back to pre-pandemic norms, which in itself is not a red flag,” he said, despite “this slight deterioration in debt levels.”

“What we are monitoring is if there is continued deterioration.”

Scores held steady as consumers take on more debt

As prices surged across the board, there’s no doubt Americans fell more in debt.

And yet, credit scores have remained stable despite the dramatic rise in the cost of living, which has caused more consumers to rely on credit, credit card balances for jump and an increase in missed payments.

In April 2022, average credit card usage was just over 31%, up from 29.6% a year earlier.

Your utilization rate, the ratio of debt to total credit, is one of the many factors that can influence your score. Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the effect of high balances.

“We are watching closely what the next six months will bring,” Dornhelm said.

There are many factors at play, he added, including inflationthe the job market and lodgingas well as the withdrawal of Covid-era government stimulus packages, including President Joe Biden’s most recent announcement that payment break on most federal student loans would be extended “one last time” through Dec. 31.

What number makes a “good” credit rating

Generally speaking, the higher your credit score, the better off you are when it comes to getting a loan. You are more likely to be approved, and if you are approved, you may qualify for a lower interest rate.

A good score is usually above 670, a very good score is above 740, and anything above 800 is considered exceptional.

An average score of 716 on FICO measures means that most lenders will consider your creditworthiness “good” and are more likely to grant lower rates.

National average credit scores hit a low of 686 during the housing crisis more than a decade ago, when there was a surge in foreclosures. They rose steadily until the pandemic, when government stimulus programs and an increase in household savings helped scores reach an all-time high of 713.

For Minorities, Credit Score Disparities Still Exist

But these upward trends are not generalized.

Young adults from majority-black, majority-Hispanic communities have lower average credit scores than their white counterparts, separate study finds Analysis of the Urban Institute based on Vantage scores. And they are more likely to see their credit ratings deteriorate over time.

From 2010 to 2021, about one-third, or 33%, of 18- to 29-year-olds in majority-Black communities and more than one-quarter, or 26%, in majority-Hispanic communities saw their credit score decline, compared to only 21% of those in majority white communities.

Between the ages of 25 and 29, young adults from majority-Black communities have a median credit score of 582, barely above the range considered bad, compared to those from majority-Hispanic communities, who have a median score of 644. , and those in majority-white communities, which have a median score of 687, according to the report.

“These credit disparities are rooted in decades of discriminatory policies that have denied communities of color equal access to affordable financial services and wealth-creating opportunities,” the Urban Institute said.

At the same time, said FICO’s Dornhelm, credit scores have helped “democratize credit and allow consumers to qualify for credit quickly and fairly compared to earlier days, when underwriting was more subjective to consumers.” prejudices”.

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