The Average FICO® Score Reaches 711
Have you checked your FICO® Score lately? You may be one of the roughly 120 million consumers whose scores are higher than they were at the start of the year. Based on recent data, the average FICO Score 8 is now at 711— five points higher than the average score last year. In fact, the national average FICO Score has risen steadily over the past decade. See in Figure 1 below:
FICO Scores, which lenders use to predict credit risk, range from 300 to 850, with higher scores being better.
What's Driving the Latest Average FICO® Score?
Late payments are down.
A deeper dive into the underlying credit report data provides some interesting insights, like fewer missed payments reported. Amidst job losses, pay cuts, and furloughs for some consumers affected by the coronavirus, the number of accounts reported with delinquencies has decreased. As of July 2020, just 7.3% of the population had a 90+ day past due missed payment in the past 6 months. This is down from 8.1% pre-COVID (Jan 2020).
Consistently paying bills on time can have a substantial and positive impact on your FICO® Scores. In fact, it represents some 35% of the overall FICO Score calculation.
FICO® Scores do not negatively consider forbearance/deferment agreements.
Accounts reported with credit reporting codes related to payment relief programs such as forbearance or deferment, or that the consumer has been 'affected by disaster,' will not cause the FICO Score to drop. This should be welcome news to consumers with an account being reported in some form of payment accommodation since the onset of the pandemic. In fact, if a consumer is placed in forbearance or deferment, along with their account status being reported as "current" instead of as "delinquent," it will ensure that their FICO Score won't be impacted by late payments related to the effects of the COVID-19 pandemic.
Debt levels are dropping.
With stay-at-home and social distancing orders in place in many states, we have less opportunity to spend money. Travel, restaurant, brick-and-mortar shopping, and entertainment spending dropped 50% or more at the onset of the pandemic, according to data from the New York Times. As of July 2020, U.S. consumers had on average $6,004 in credit card debt, down from an average of $6,934 back in January 2020.
A reduction in amounts owed (30% of the FICO® Score calculation), and in particular, the amount of credit card limits being used, can increase a person's FICO Scores.
Where Does the Average FICO®Score Go From Here?
Strong average FICO Scores and healthy financial habits are certainly something to celebrate, but when it comes to economic recovery, there is still plenty of uncertainty. Unemployment is improving, but is still at 7.9% as of September 2020. For comparison, the unemployment rate was 3.5% in February 2020 and peaked at 14.7% in April 2020. In addition, unknowns remain regarding future government stimulus programs as well as lender's continued appetite to offer payment relief programs.
It is also important to keep in mind, there is a lag between major macroeconomic events and its impact on FICO Scores. It can take several months for the effects of that event and the accompanying financial strain to start to show up in consumers' credit reports, in the form of rising balances, credit-seeking behavior, and eventually, for some, missed payments. If we examine the Great Recession, for example, the average national FICO Score didn't hit its lowest point until late 2009, months after the recession officially began in December 2007.
Credit Appears to Be Tightening
Given the significant uncertainty that remains around the pandemic and economy, creditors have tightened the reins on lending. Getting approved for credit cards and loans may be a bit more challenging, at least in the short-term. If you're shopping for a mortgage, in particular, you may need to provide additional documentation, pay a higher down payment, and lower your debt before you can be approved.
Holding On To Your Good Credit Score
While the average score trends at the national population level are interesting, it's our own credit scores that are the most important to each of us. Regardless of where the national average FICO® Score stands, you can manage your FICO Scores by continuing to make your payments on time and monitoring your FICO Score. If you're having trouble making payments, contact your creditors and lenders to talk about your options before you miss a payment. Amidst all this uncertainty, staying on top of your FICO Scores is a savvy financial move.