Why FICO scores are up
After a year since COVID struck the U.S., FICO credit scores are up—a lot. For the past decade, the average FICO score has grown at around one point per year. In 2020, despite record unemployment, the average FICO score in the U.S. climbed seven points —from 703 in 2019 to 710 in 2020.
To look at why this increase may have happened, we first need to understand what makes up a credit score. The exact models vary, but the central factors, in order of importance, include:
- Payment history
- Credit usage
- Credit history length
- Credit mix
- New credit
What’s Behind the Increase?
While it may seem contrary for credit scores to be up amidst a global pandemic, there are specific factors contributing to the increase.
COVID Loan Assistance and Changes in Reporting
Borrowers with hardships due to COVID-19 were able to delay payments without negatively impacting their credit by making accommodations with their lender in the form of forbearance or loan deferrals. The CARES Act protects borrowers from adverse credit reporting on the credit reports of consumers given mortgage relief or assistance related to the COVID-19 emergency.
In June 2018, The Consumer Data Industry Association (CDIA) updated guidance within its Metro 2® FAQ 58 pertaining to natural or declared disaster area reporting to reduce negative impact on credit scores due to financial problems. The association communicated about how to adjust reporting for:
- Accounts affected by natural and declared disasters (FAQ 58)
- Accounts in forbearance as a result of a natural or declared disaster, or for other reasons (FAQ 45)
These long standing processes and guidelines to minimize the negative impact of disasters on consumers helped (and is helping) credit scores remain intact. By avoiding what could have been a delinquency in non-COVID times, consumers have been able to keep their payment history steady and defer payments without taking a negative hit to their credit scores.
Decreasing Credit Card Balances
As we saw in the NCUA data, both credit card balances and delinquency are down in 2021 compared to 2020. Balance decreases and lower delinquency impact the top two credit score factors, payment history and credit usage.
According to TransUnion, total U.S. credit card balances dropped to $688 billion in Q1 2021, compared to $814 billion in Q1 2020. Average consumer credit card debt per borrower dropped to $4,791 in Q1 2021, the lowest level since at least 2009 when TransUnion first began measuring this variable.
These changes are likely a direct result of the COVID-19 pandemic, specifically:
- Consumers using stimulus checks to pay down balances
- Less discretionary spending (travel, eating out, concerts, etc.)
- Economic uncertainty causing consumers to limit big ticket expenditures
Will Improved FICO Scores Decline?
As the vaccines continue to roll out and we return to a new normal, pent up demand will take hold and discretionary spending for travel, entertainment, restaurants, and more will increase. That will in turn increase credit card balances, increasing utilization rates which may impact credit scores.
Also, as COVID assistance programs expire, the true economic situation of a borrower may reveal itself in the form of missed payments and delinquencies. These missed payments without the protection of disaster codes will negatively impact credit scores. Average FICO credit scores may decline from the 710 average we saw in 2020 but are not likely to fall to pre-pandemic numbers. That’s because for the most part, borrowers are in a better financial position than they were pre-COVID. Household debt as a percentage of disposable income is at all-time lows going back to 1980. With less debt you are in a better financial position to pay your bills on time and have a lower percentage of credit usage, key factors into the health of your credit score.
Understanding FICO changes in your loan portfolio is a key to making data driven business decisions. At 2020 Analytics, we can update your members’ credit scores and collateral values to provide actionable insights to your loan portfolio. Learn more today.
