The average credit score dropped for the first time in over a decade.
The drop is only one point, from 718 to 717, but it is still an important indicator that Americans are struggling with debt. Data analytics firm FICO, creator of one of the most commonly used credit scores, said in a report released Wednesday that rising debt and defaults were to blame.
FICO scores, which most U.S. lenders rely on to determine whether to provide loans to customers, usually range from 300 to around 850. A credit score between 670 and 739 is considered “good,” and anything higher is “very good” or “excellent”, indicating that a borrower is a safe risk.
Overall, credit scores have risen steadily since late 2009, when the national average was a tepid 686 amid the Great Recession. Since then, the average credit score has increased more than 30 points, thanks in part to the removal of negative information like medical debt from credit reports (a policy adopted in 2022) and federal financial aid during the pandemic. In April 2023, the average score reached 718, the highest ever recorded, and remained at that level during FICO’s latest analysis in July.
This most recent data point is from October.
Why credit scores are declining
Factors such as missed payments, excessive use of credit cards, and defaulting on debts can cause a decrease in credit scores.
In addition to the decline in the average score, FICO data shows that the delinquency rate – which indicates how much of the population has missed a payment for 30 days or more – rose to 18% in October, 4% higher than in April. Average credit utilization, or the percentage of available credit a customer uses at any given time, has risen to 35% (it is generally recommended to keep credit utilization no higher than 30%).
FICO scores are a lagging economic indicator, meaning they reflect long-term trends but don’t necessarily predict them. While a one-point drop doesn’t mean the country is in an economic crisis, FICO said the decrease suggests that high interest rates and persistent inflation are starting to take a toll on consumers.
Other measures of consumer credit health have shown similar trends. Recent data from the Federal Reserve Bank of New York shows that auto loan delinquencies continued to rise in the final quarter of 2023. VantageScore, another consumer credit scoring system, found that delinquencies on all auto loan products credit reached their highest levels in four years in January.
The reasons why borrowers are in trouble
Looking at recent trends in debt, it’s no surprise that consumers are struggling to manage their debt. U.S. households carry a record $1.13 trillion in total credit card debt. Total household debt now stands at $17.5 trillion.
During the pandemic, many Americans have been able to save money thanks to reduced spending and stimulus payments. But soaring inflation in recent years and subsequent interest rate hikes by the Federal Reserve have largely depleted those savings. As a result, more and more people have turned to credit cards to cover growing household expenses.
Now that credit card average annual rate, or APR, hovers above a record 21%, those bills are becoming increasingly difficult to pay off. And with inflation still above the Fed’s long-term target of 2%, consumers continue to grapple with rising prices and interest rates.
At the same time, some essentials, such as auto and homeowners insurance, continue to increase. Student loan payments also returned in the fall, after a pause of more than three years due to the pandemic.
While the Fed is expected to gradually begin cutting the federal funds rate this year, there’s no telling when (or how much) interest rates will actually fall. Rates on products like credit cards are unlikely to drop significantly by the end of 2024.
Consumers will have to be creative to manage the combination of high prices and high interest rates to prevent their debt from becoming even more unmanageable. For help, be sure to check out Money’s tips for paying off credit card debt.
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