Consumer Credit Scores Experience First Decline in a Decade Amid Economic Uncertainty and Inflation
Despite historically low unemployment rates and recession fears subsiding, consumer credit scores have started to show signs of strain. According to data released by FICO, the leading analytics company that evaluates borrower strength, the national average FICO score dipped to 717 in October, marking the first decline since 2013. This decrease follows a decade of continuous improvement and remains above pre-pandemic levels.
Economic Pressures Mounting on Consumers
FICO reported that the one-point decrease in credit scores was due to an increase in Americans missing payments and rising debt levels. As a result, this is a significant indicator of financial stress among some consumers, with the cost of living remaining high and interest rates adding to the pressure.
“The effects of high interest rates and persistent inflation may be starting to weigh on consumers, especially those already struggling to manage their finances,” wrote Can Arkali, FICO’s senior director of scores and predictive analytics.
A Shift in Consumer Credit Trends
Before the decline, credit scores had been steadily increasing since the 2013 drop to an average of 690. Even during the turmoil of the Covid-19 pandemic, job loss was spiked but stimulus checks and forbearance from banks and credit card companies helped many consumers avoid financial troubles.
Escalating Credit Card Debt and Delinquencies
U.S. credit card debt reached a record high of $1.1 trillion in December, according to the New York Fed. Additionally, just over 18% of the population had a 30-day or worse past-due payment on at least one credit account in the prior year, representing a 4% increase from April.
“The apparent cumulative impact of higher interest rates, elevated consumer prices, and economic uncertainty has put a financial strain especially on those consumers who heavily rely on credit cards to cover everyday expenses,” Arkali said.
When consumers fail to repay their loans for an extended period, banks write off the bad debt as a loss. The net charge-off rate on credit card loans climbed to 4.15% at the end of last year, the highest since early 2012 according to the Federal Deposit Insurance Corporation.
Consumer Priorities and Payment Trends
Despite increased financial stress, consumers have continued to prioritize paying their mortgage and car loans. However, missed payments on bank cards are now above pre-pandemic levels. The New York Fed found that credit card and auto loan delinquencies have reached their highest level in more than a decade, indicating “increased financial stress, especially among younger and lower-income households.”
Positive Forces for Consumer Balance Sheets
Gus Faucher, PNC’s chief economist, pointed to several positive factors that can help American consumers manage their financial situations, including historically low debt burdens, a strong job market, rising household wealth due to booming home and stock prices, and growing paychecks that are outpacing price increases.
“The overall outlook for consumer credit quality and consumer spending growth,” Faucher said, “is still very solid.”
