Americans’ credit scores have come a long way in a decade.
The average FICO score has reached a new high of 706, FICO said Tuesday, having edged up consistently over the past nine years. The national average previously reached a low of 686 in October of 2009, at the tail end of the Great Recession. Last year’s average was 704.
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A score within the range of 670 to 739 is considered “good,” according to FICO, while the 740 to 799 range is “very good” and 800-plus is “exceptional.”
There appear to be two key economic drivers contributing to these steadily rising scores, Ethan Dornhelm, vice president of FICO scores and predictive analytics, told MarketWatch in an email. One is a “stable and growing economy driving low unemployment, higher wages, and greater financial health,” he said.
But there’s one more reason that goes beyond the obvious more robust economic backdrop, Dornhelm said: There’s also heightened consumer awareness of FICO scores, he said, pointing to a 2018 Sallie Mae study that found customers who frequently check their FICO scores are more responsible with their finances.
There were other structural reasons for the rise. “Negative information has been removed from credit files, driven both by the Fair Credit Reporting Act-mandated requirement to purge negative information from consumer credit files after 7 years, as well as by refined reporting standards implemented by the credit bureaus,” Dornhelm added.
Dornhelm cited the National Consumer Assistance Plan, an effort led by Equifax (EFX), TransUnion (TRU), and Experian (EXPGY), to make credit scores more accurate, in part by removing data such as medical debts.
The score provided by FICO, named for the Fair Isaac Corporation, is widely used as a measure of a person’s creditworthiness — in other words, his or her reliability in paying back loans — for lending decisions like auto loans and mortgages.
The average-score increase is due to score improvement rather than score inflation, Dornhelm said. “In comparing the average U.S. consumer credit profile between 2009 and 2019, the 20-point increase in average score is driven by clear improvements across most key dimensions of the consumers’ credit profile,” he said.
“Not only are account-level delinquencies down by double-digit percentages relative to 2009, but other key factors such as credit-seeking activity and the ratio of balances to credit limits on card accounts are substantially improved as well,” Dornhelm added.
“The ratio of balances to credit limits on card accounts (also known as credit-card utilization ratio) is a key driver of the FICO score, where lower ratios represent better repayment likelihood. This utilization ratio is down 28% over the past decade,” he said.
FICO scores, which are calculated using data from the major credit bureaus Experian, TransUnion and Equifax, tend to range from 300 to 850. They incorporate payment history, amounts owed on accounts, the length of a person’s credit history, the number of new credit accounts and the mix of types of credit.
Millennials, who are now between the ages of 23 and 38, have had less time to build up a solid credit history, so they tend to have lower credit scores on average than their older counterparts. Millennials’ average FICO score in the fourth quarter of 2018 was 665, according to Experian, compared to baby boomers’ 732 and the silent generation’s 756.
Shares of Equifax, TransUnion and Experian have been up 50%, 46% and 26% respectively this year to date, compared to a 15% gain for the Dow Jones Industrial Average (.DJI), and an 18% increase the S&P 500 Index (.SPX).
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