Consumers are increasingly relying on credit cards to make ends meet, but this has not 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 have surged across the board, there is no doubt that Americans have taken on more 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 to 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 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 high balances can have.
“We are watching closely what the next six months will bring,” Dornhelm said.
There are many factors at play, he added, including inflation, the labor market and housing, as well as the withdrawal of Covid-era government stimulus packages, including the President Joe Biden’s most recent announcement that the payment pause on most federal student loans would be extended “one last time” through December 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’re more likely to be approved, period, and 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.
According to a separate analysis by the Urban Institute, young adults from majority-black and majority-Hispanic communities have lower average credit scores than their white counterparts. 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, the scores helped “democratize credit and allow consumers to qualify for credit in a quick and fair way compared to previous days when underwriting was more subjective to bias,” noted FICO’s Dornhelm.
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