FICO Reports First Decline in American Credit Scores in a Decade

FICO, the credit scoring firm, has reported a decline in the average credit score of Americans for the first time in a decade. This drop comes as a result of increased missed borrower payments and rising consumer debt levels. As of October 2023, the national average FICO score was 717, down one point from the previous year. FICO suggests that this decrease indicates the impact of high interest rates and persistent inflation on consumers, particularly those who are already struggling to manage their finances.

The rise in missed borrower payments and consumer debt levels can be attributed to several factors. The cumulative impact of higher interest rates, elevated consumer prices, and economic uncertainty has put a strain on consumers who heavily rely on credit cards to cover everyday expenses. This can lead to higher credit card utilization and subsequent defaults on credit card payments. In addition, consumer debt is now higher than it was pre-pandemic, with credit card balances exceeding $1 trillion last fall.

New credit activity has also slowed down, with fewer Americans opening new credit accounts in recent years. FICO speculates that this decline may be due to a fall in mortgage origination volumes. The decrease in FICO scores is not seen as a major concern by some economists, who believe that certain households are simply under financial stress due to inflation hitting lower-income households harder.

Credit card troubles are also on the rise. According to the New York Fed, credit card balances of Americans reached $1.13 trillion by the end of December 2023. Approximately 8.5 percent of credit card balances transitioned into delinquency, with serious delinquencies increasing among people of all age groups, especially younger borrowers. More U.S. consumers are struggling to pay off their credit card dues each month, with nearly half of credit card holders not paying off their dues in full. Many are not fully aware of the high interest rates charged on their cards, leading to a cycle of compounding debt.

The leading cause of incurring credit card debt is unexpected emergency expenses, according to a Bankrate survey. In fact, 36 percent of U.S. adults have more credit card debt than emergency savings, the highest level since 2011. Millennials and Gen X individuals are particularly vulnerable to having more credit card debt than emergency savings compared to baby boomers and Gen Z. However, more Americans are now focusing on paying down debt and boosting emergency savings simultaneously.

To address these issues, financial experts recommend automating savings by setting up a dedicated savings account and channeling take-home pay toward paying down debt. This can help individuals manage their finances more effectively and avoid falling into the cycle of increasing debt. Overall, it is important for Americans to be aware of their credit scores, interest rates, and the cost of carrying debt in order to make informed financial decisions and improve their financial well-being.