Ask FICO: Do More Americans Have Higher FICO® Scores? Yes!
, by Tom Quinn
Good news! Recent research by FICO finds that the average FICO® Score 8 in America reached 700 this past spring. What does this mean? It means that more people probably have access to credit and at better rates than compared to the last several years.
This continues a trend that FICO research has observed in which the average FICO® Score has continued to increase since the severe economic recession in the mid to late 2000's. The 700 mark represents a 10 point increase in the national average FICO Score of 690 observed in the fall of 2006.
Part of the increase is likely due to the large number of missed payments, foreclosures and bankruptcies posted during the "great recession" that are now aging off credit reports. Per the Fair Credit Reporting Act (FCRA), all derogatory payment information must be purged from a consumer's credit file no later than 7 years after the negative event occurred (10 years for certain types of bankruptcy).
For example, there continues to be a steady decrease in the percentage of consumers with recent serious delinquencies (defined as 90+ days past due)—from 19.4% in October 2013 to 18.2% in April 2015 to 17.1% in April of this year. Since payment history comprises roughly 35% of an overall FICO® Score calculation, this sustained reduction in delinquency is a clear contributor to the upswing in the FICO Score distribution. Falling unemployment rates may be an indication that more people have jobs and likely a greater ability to make payments as agreed on their credit obligations, which could also be contributing to this trend.
Having a higher FICO® Score can translate into meaningful benefits for consumers. For example, assume the following two individuals are each planning to purchase a new home this summer and will need a mortgage loan:
| Bob | Susan | |
| Employment | Accountant | H.R Manager |
| Annual Income | $59,000 | $64,000 |
| Savings | $65,000 | $59,000 |
| Home Price | $250,000 | $250,000 |
| Down Payment | $25,000 | $25,000 |
| Loan Amount | $225,000 | $225,000 |
| FICO® Score | 679 | 700 |
FICO® Scores are used in the mortgage lending process to help lenders determine if they will approve a particular mortgage loan and what interest rate will apply. Applicants with higher FICO® Scores will generally receive more favorable rates that can translate into thousands of dollars in savings over the life of the loan.
| __Bob__ | __Susan__ | |
| __Loan Type__ | 30-year fixed | 30-year fixed |
| __APR*__ | 4.221 | 3.83 |
| __Monthly Payment__ | $1,103 | $1,052 |
| __Total interest paid**__ | $172,097 | $153,810 |
** Average national APR for 30-year fixed mortgage by FICO® Score band sourced from Informa Research Services, Inc.,*
*** Over the life of 30-year loan*
Under this projection, with just a 21 point difference in FICO® Score, Susan would qualify for the lower APR, resulting in a slightly lower monthly payment and saving in interest of $18,287 over the life of the loan. Similar dynamics can be found with auto financing, as those interest rates also vary by FICO Scores.
Thinking about purchasing a car or new home in the near future? You can visit myFICO's loan savings calculator to understand the potential rates you may pay based on your FICO® Score. It is easy to use - simply select your preferred loan type for mortgages or auto loans, enter your loan amount, identify your state of residence and hit the calculate button. The calculator presents the average interest rates in that state by FICO Score band, a projected monthly payment amount, projected interest that would be paid over the life of the loan and an analysis of the potential savings in interest based on higher FICO Score tiers.
Go check how a higher FICO® Score can save you money and the steps to get to a FICO Score of 800!
Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.