Are many credit scores riding a false high?

Richard Barrington
Written by
Richard Barrington
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How’s your credit score looking these days?

If you’re like many Americans, chances are it’s pretty good. Despite all that consumers have been through in recent years, they’ve kept their credit scores peak shape.

However, if you look a little closer, there are clear signs of trouble ahead. Credit scores have benefited from some unusual conditions which no longer exist. Instead, credit conditions increasingly show signs of deteriorating.

This all comes to a head in 2024. To be prepared, take steps now to protect your credit score.

Credit scores are looking good – for now

In 2023, the average FICO score for U.S. consumers hit an all-time high of 718.

To put that in perspective, ten years earlier the average FICO score was just 691. Back then, scores were still recovering from the Great Recession, the effects of which drove the average score down a low point of 686 in late 2009.

It’s only natural that credit scores should suffer during a recession. Unusually though, there was no negative impact on credit scores during the 2020 recession. In fact, the average credit score actually improved during that economic downturn. But then, that was far from a typical recession.

Credit scores benefited from pandemic-era programs

The U.S. economy went into a recession in February of 2020, when the pandemic began to restrict economic activity. Despite this, the average credit score rose from 706 in late 2019 to 713 in late 2020.

The reason is that the 2020 recession was unusual in several ways:

  • First of all, it was much shorter than any other recession on record, lasting only two months. Records going back to the mid-1800s show that the next shortest U.S. recession was six months. Normally, a two-month period wouldn’t be long enough to be considered a recession. However, the economic downturn in early 2020 was so severe that it had to be considered significant. Economic activity declined by 28% in the second quarter of 2020.
  • An extraordinary amount of direct financial assistance was given to individuals and businesses very quickly. This included stimulus checks that were sent to most Americans, regardless of whether they had actually been financially hurt by the pandemic.
  • A variety of payments that were due were suspended during the pandemic, most notably student loan payments.
  • People generally shied away from spending money because of health concerns, not because they were short of money. This allowed them to pay down bills and build up savings during the recession.

In a way, all of the above helped the economy make a speedy recovery from the pandemic. However, it raised questions about how well the economy would fare once the extra government support expired.

Credit scores may be heading for trouble

Besides rising during the pandemic recession, credit scores have continued to increase as the economy has reopened. However, there are reasons to doubt that this can continue.

Consumer debt balances are at an all-time high. Late payment rates are rising.

The amount of debt and payment history are important factors in calculating credit scores. So, recent trends don’t bode well for those scores.

A study by the Federal Reserve Bank of St. Louis found that credit card delinquency rates are rising especially fast among people who significantly improved their credit scores during the pandemic. That suggests that for many of those customers, those improvements won’t last.

A recent report by VantageScore noted that while credit scores have been stable recently, rising delinquencies were likely to drive scores downward in the months ahead. Consumers whose credit scores improved during the pandemic need to prepare themselves for a possible relapse in their scores.

2024 could be decisive

Next year could well see a reversal of the trend toward higher credit scores, for the following reasons:

  • As noted, delinquency rates have already been rising.
  • Consumers enter 2024 with record debt balances and interest rates at the highest level in decades, making their debt payments even more expensive than before.
  • Student loan borrowers will be expected to resume making payments.
  • Many households have burned through the reserves they built up during the pandemic.

In terms of this last point, a survey by the Consumer Financial Protection Bureau found that as of 2023, 39.7% of households could not meet expenses for a month if they lost their primary source of income. This is up from 37.3% in 2022, and 38.1% prior to the pandemic.

Lenders are pulling back

Lenders are well aware of the rising level of risk many consumers represent. In response, they are tightening their lending standards.

A Federal Reserve survey found that an increasing number of senior loan officers report their banks are more cautious about approving loans these days. They also are tightening credit limits on some existing credit card accounts and charging more interest to higher-risk customers.

What all of this adds up to is that lenders are demanding higher credit standards just when many consumers are poised to see their credit scores fall.

How to protect your credit

If you’re counting on continuing to use credit in 2024, it’s vitally important that you take extra care of your credit score. For example:

  • Be especially careful about not missing any payments, because in this environment you could pay dearly if you do.
  • Whenever possible, make more than the minimum payment on your credit card bills. This will help you pay down debt faster and minimize interest charges.
  • Try to rein in spending so you don’t depend on continued borrowing.
  • Keep in mind that credit card debt is an especially expensive type of debt. Try to avoid using it for purchases you won’t be able to pay off in a month or two.
  • Be aware of the interest rates you’re paying on each of your credit cards, and where possible try to utilize lower-cost credit.

Consumers benefited from a bump to their credit scores over the past few years. However, in many cases this was due to unusual circumstances which no longer exist. Sustaining those improved credit scores going forward may require improved credit habits.

Richard Barrington
Cardratings Contributor

Richard has over 30 years of experience in financial services, including 23 years with the investment management firm Manning & Napier Advisors, Inc., where he led the Marketing Group and served on the firm’s Investment Policy Group and Executive Group. Over the years, Barrington has...Read more

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