Why Are Average Credit Scores Rising When The Economy Is Tanking?

Despite the devastating economic impact of the coronavirus pandemic, the average credit score of consumers in the U.S. reached a record high in July.

The average FICO credit score – determined by its creator Fair Isaac Corp. (FICO) – reached 711 in July, the Wall Street Journal reported. That figure (the highest average since FICO started keeping records in 2005) was up from 708 in April and 706 in July 2019. (FICO scores can range from 300 to 850).

The average credit score has appeared to hold steady through the middle of October.

The surprisingly high average credit score has likely been driven by massive stimulus and expanded unemployment benefits from the federal government – these funds have allowed tens of millions of people to keep up with their rent, mortgage and credit card payments.

Consumers were also helped by payment holidays offered by lenders on mortgages, auto loans and student loans. Some Americans were even able to pay down their debt – thereby boosting their credit profiles.

Indeed, as of July, only 7.3% of borrowers had a missed payment that was more than three months overdue in the past six months – down from a comparable figure of 8.1% in January.

However, the Journal noted that rising credit scores – amid a continuing economic calamity – makes it even more difficult for banks and lenders to properly assess risk. Because, while millions of people have been able to keep up with payments, many remain unemployed and surviving on government benefits.

Moreover, credit scores are typically a lagging indicator in evaluating the financial health of households. In addition, Congress and the White House have yet to agree on a new stimulus package – raising concerns about the continued ability of Americans to meet their various payments.

“First the [macroeconomic] stress occurs, and then it takes a few months for the strain to show up in people’s credit reports,” Ethan Dornhelm, vice president of scores and predictive analytics at FICO, told the Journal.

Dornhelm told CNBC that a FICO score “shouldn’t be thought of as a leading indicator or as a predictor of where the economy is headed.”

Indeed, during the Great Recession, the average FICO score in the U.S. did not sink to its lowest point until October 2009 when it fell to 686 – more than one year after the epic collapse of Lehman Brothers.

“The degree of coordinated government intervention and stimulus spending is different this time around relative to prior crises,” Dornhelm added.

FICO scores are also unaffected by forbearance and deferment agreements, Dornhelm noted. In addition, consumer credit card debt is decreasing – from $6,934 in January to $6,004 in July. All of these factors help to boost credit scores.

But Dornhelm warned that in light of so much economic uncertainty, “there’s still no clarity around what the shape of this downturn and what the recovery is going to look like… Consumers are [now] making do with whatever the state unemployment benefit level is.”