Credit Scores Trending Upward
Congratulations, America! Your average FICO credit score reached 704, continuing the upward trend of the last eight years.
According to a recent FICO blog, the 704 average score is the best average ever recorded on the 300-850 standard FICO scoring scale. America's average score sank to 686 in October 2009 thanks to the housing crisis and subsequent recession, but credit scores recovered slowly along with the economy.
How did we reach these new heights? Mostly through hard work and better attention to credit scores, with a little help from policy changes.
The FICO data shows that credit score increases aren't isolated to a population segment. Average scores are improving in almost all demographic categories.
Perhaps the most encouraging news involves the lower end of the credit scale. The recent data shows far fewer consumers with very low credit scores and a steady decline for the lowest subprime category (credit scores below 500) over the last ten years.
In 2018, only 4.2% of consumers have the lowest subprime FICO scores (300-499). That's down from 4.7% last year. The poorest-credit percentage has been steadily dropping since an average of 7.3% in 2009. Percentages either declined or stayed constant in the other lower to medium credit score categories (500-549, 550-599, 600-649, and 650-699).
Meanwhile, more consumers are entering the very good or excellent credit categories. Just over one in five Americans has a FICO score between 750 and 799, and 21.8% have FICO scores above 800.
While the average FICO score goes up with age – as you would expect given thinner credit profiles and histories with younger consumers – the increase in average score by age group seems reasonably consistent. All age distributions showed an increase of five points, except for the 50-59 age group showing an average increase of four points.
Even an apparent negative can be viewed as a positive sign. The average FICO credit score for approved mortgage loans fell from 745 in 2013 to 733 in 2018 – but FICO attributes that to a slight loosening of credit to allow more homebuyers access to the market.
Lower Demand, Better Education
All of the above factors show greater credit responsibility. That's reflected in lower numbers of hard pulls on credit reports – the number of requests by creditors to fully evaluate a person's credit risk. Only 42.2% of credit reports had hard pulls as of April 2018, a full percentage point below 2017's rate.
FICO's blog suggests that better education is key, citing February 2018 research from FICO and Sallie Mae. The study found that consumers who regularly check their credit scores are more likely to have higher scores and make sound financial decisions.
While it's good to check credit scores, it's critical to check your credit report. Your credit score is calculated from the information in your credit report, and errors or fraudulent use of your accounts could be dropping your score. If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, join MoneyTips.
Credit report awareness has improved, according to a 2018 study by the Consumer Federation of America (CFA). The CFA found that 36% of Americans checked their credit report in 2018, compared to 29% in 2014. A separate study from CompareCards.com found 37% had checked their credit report in 2018 – but both studies showed that over half of Americans had checked their credit score in the same time period.
The message: monitor your credit score regularly, but periodically check your credit report so you understand the reason for any changes that you see.
A Helpful Policy Change
Credit scores also received a boost from the National Consumer Assistance Plan – a product of a settlement between the three major credit bureaus and the attorneys general from 31 states. Questions about credit reporting accuracy led to the removal of civil judgments and tax liens from people's credit reports. The policy was fully implemented earlier in 2018.
With those negative events removed, credit scores rose by approximately 11 percentage points on the Equifax risk scale, according to the Federal Reserve's Household Debt and Credit Report. That's consistent with FICO's data showing a drop in negative events on credit reports (23% in 2018 versus 25.8% in April 2017) – although negative events have been on a steady decline since 2014.
The overall effect on scores is limited, since civil judgments and tax liens affect a minority of Americans – and the ones who are affected often have very low credit and other high risk factors. Still, small improvements add up to produce a higher average.
Did your credit score help America earn the highest average score ever? If so, congratulations and keep up the good work. If not, make some changes so you can bring up the average next year.
Look over your credit report for any mistakes or fraudulent charges that could be dragging down your score. Pay all bills on time every month. Adjust your budget to keep your overall use of credit down. Use monthly surpluses to pay down your debt.
You may not bring America's average credit score up – and that's fine. The only credit score that matters to you is your own. Can you make your credit score the best that it's ever been?
You can check your credit score and read your credit report for free within minutes by joining MoneyTips.