Americans credit scores continue to improve. But credit scores don’t tell the whole story of how consumers are faring financially.
A new report from Experian EXPN, found that the average FICO Score in the U.S. reached an all-time high in 2019 of 703, up from 701 a year earlier and 14 points higher than back in 2010. Altogether, 59% of Americans have a FICO score of 700 or higher, the largest percentage ever at that threshold.
Having a credit score at or above 700 is generally an indicator of good credit for most lenders, Experian noted. “These borrowers may receive a wider variety of credit product offers, at better interest rates, than those with scores below 700,” Matt Tatham, manager of content insights and data analyst at Experian Consumer Services, wrote in the report. “A score of 800 or higher is usually considered excellent.”
The growth in credit scores largely reflects the positive changes consumers have been making. Late-payments and delinquency rates have steadily dropped for most forms of debt over the last decade, which has gone a long way toward improving scores. Moreover, the average credit score among millennials has improved 25 points since 2012.
“These higher credit scores are due mostly to our decade-long economic expansion,” said Ted Rossman, industry analysts at CreditCards.com and Bankrate. “Generally speaking, consumers are doing a good job keeping up with their bills.”
Credit scores aren’t designed for consumers’ sakes
Now for the bad news: Rising credit scores doesn’t necessarily mean Americans are better off financially. On-time payments haven’t translated into lower debt balance. In fact, debt balances have risen on average over the last year for most types of loans, Experian found. A separate study from Bankrate found that two-thirds of people with credit-card debt owe at least as much now as they have over the past decade.
Juggling all these payments can leave Americans’ strapped for cash. But it’s that very juggling that may be benefitting people’s credit scores. Having different forms of credit can reflect positively on a person’s credit history and give them a boost, even if it means growing the total amount of debt they owe.
“Consumers making all those payments on these different types of debts could be raising their scores,” said Sara Rathner, credit-card expert at NerdWallet.
Credit scores weren’t designed for consumers, said Peter Hoglund, a New Jersey-based senior vice president at national wealth management firm Wealth Enhancement Group. “They are meant to represent whether the person would be a good client of the potential lender,” he said.
Moreover, credit-scoring models may reward some behaviors that might otherwise not be in your best interest financially. “Paying off loans and closing out credit cards may be in your best interest, but often may be a demerit to your score,” Hoglund said.