It seems like the news media is full of exclusively bad news, especially when it comes to the economy. You can’t turn on the news without some talking head telling you that the sky is falling and that no one can do anything about it when it comes to the economy.
Therefore, it’s understandable if you feel like the current financial situation in the United States is trending downward. Well, while it’s not all milk and honey out there, plenty of indications exist that the economy is doing just fine.
One such indication is that the average American credit score is at an all-time high.
This report from Fox Business helps break down the situation for us.
According to the journalists over at Fox Business, the average American credit score hit 700 in April, the last full month for which we have data. That’s the highest that number has been since 2005, when Fair Isaac Corporation began to track credit scores.
The population of Americans with “bad” credit scores (defined as below 600) also fell to a record low of 20%, down from as high as 25.5% in 2010.
As we talk about “average” credit scores, it’s important to note that average means something different for everyone. For instance, as this chart from ValuePenguin shows, the average score for an older American is much, much higher than the average score for someone under 30.
Credit scores are just numbers if you don’t understand them. What does this new record high mean for the American economy? What does it mean for you as an individual? What can you do to continue to bring your credit score up?
Why, exactly, are credit scores at an all-time high?
We all remember the housing crisis and recession back in 2008, when the state of the economy was dark.
If you don’t, here’s a refresher.
Back in 2006, housing prices started to fall. No one sounded the alarms at that point; they just thought the housing market was re-adjusting.
In the background, though, questionable lending and overeager homeowners were setting the stage for the biggest financial crisis in the United States since the Great Depression.
On one hand, banks were offering home loans for 100 percent or more of what homes were worth. On the other hand, borrowers were more than happy to take the money, even if it meant they were living outside of their means or borrowing on shaky credit.
Financial institutions, meanwhile, were engaged in risky practices of their own. Eventually, those practices caught up with them, triggering a panic that destabilized the entire economy. The homeowners who had taken out those risky mortgages now found themselves in their own financial crises, forced to declare bankruptcy, or worse, have banks foreclose on their homes.
What does this have to do with credit scores? Simple: bankruptcy and foreclosure are huge black marks on an individual’s credit report. The good news is that, after a certain amount of time, the penalties associated with bankruptcy and foreclosure fall off a person’s credit report.
The downfall of 2008 is now nearly 10 years in the past. Those penalties consolidated in a very short window of time are now disappearing (foreclosures stick around for 7 years, while bankruptcies stick around for 7 to 10 years, depending on the type). Credit scores are rising as a result.
Other factors also play into these rising credit scores. Unemployment continues to fall, and economic growth overall continues to rise. Overall, the narrative is simple: we’re finally coming out of the woods in regards to the financial crisis, and the average American credit score is starting to reflect it.
How might rising credit scores affect the overall U.S. economy?
The most obvious result of rising credit scores is a rise in available credit. As a person’s credit score improves, lenders are more willing to lend, since credit scores indicate an individual’s creditworthiness and status as a safe investment.
Increased lending is likely to come from three different sectors: auto loans, home loans, and credit card lending.
Auto loans and home loans are safe bets because they’re larger loans. For a while, lenders were cautious about these larger loans if they saw signs of bankruptcy or foreclosure on an individual’s credit history. After all, in order to finance these purchases, they’d be giving away quite a bit of money upfront. Now that those bankruptcies and foreclosures are starting to expire, lenders are much more likely to lend for cars and houses.
Credit card lending was already trending upward before the news of credit scores rising came out, but it’s likely to continue to go up now that it’s easier for the average consumer to access more credit. According to the Federal Reserve Bank of New York, a person who has a form of bankruptcy lifted from his or her credit report sees a credit limit jump of about $1,500 and ends up increasing credit card debt by about $800 within three years.
If you read the National Debt Relief blog with any regularity (or even just have a passing familiarity with what we do), you already know that we always urge caution when spending on credit. However, it’s undeniable that, overall, responsible spending is a good thing for the economy, and we’re hopeful that that’s where rising credit scores will lead.
What exactly is a credit score?
Your credit score, simply put, is a number meant to indicate your creditworthiness. How safe of a person are you to lend to? Will you be able to keep up with your debts and pay them off in a timely fashion? Have you been able to do so in the past?
Algorithms crunch the numbers and determine a credit score for just about every individual in the United States who has a Social Security number. These algorithms source data from credit bureaus on all kinds of things, including:
- How many credit accounts you have
- What types of accounts they are
- How long each has been open
- What you owe on each account
- How much of your available credit you’ve used up
- If your pay your bills on time
- Number of credit inquiries made recently
- Negative financial events such as bankruptcies, foreclosures, liens, judgments, and collections
You can lump all of that data into five major categories that the algorithm uses to calculate your credit score:
- Your payment history
- How much you owe,
- How long your credit history is
- The types of credit you use
- What new credit accounts you’ve opened
These categories are weighted much differently from each other. Your payment history is the most important, accounting for 35 percent of your score, since it shows that you have a history of paying. Amount owed counts for 30 percent, since it indicates your general financial picture and reliance on credit. How long your credit history is counts for 15 percent, showing how experienced you are with credit. Type of credit accounts for 10 percent, checking to see if you have a mix of longer-term “installment” credit (car loans, mortgages) and “revolving” credit (credit cards). New credit makes up 10 percent of your score, checking to see if you’ve opened several new credit accounts around the same time.
Out of all of that data, the algorithm generates a number for you. That number ranges between 300 and 850 and, as we already discussed the average is currently 700.
The standard credit score that most people think of is a FICO score, named after the company that measures it: the Fair Isaac Corporation. Other methods of credit scoring exist and are usually more applicable to other industries.
The short answer is that your credit score measures how creditworthy you are. Can you be trusted to pay off your debts? The better your credit score is, the more credit that will be available to you and the better the terms will be. To improve and maintain your credit score, pay your bills on time and reduce the amount of debt you owe overall. The rest will follow.
How do you check your credit score?
After reading all of this good news about rising credit scores, you probably want to know if your credit score is on the upswing as well. How can you check your credit score and see if you’re benefiting from this general upward trend?
There are four major ways to check your credit score, some of which will be more applicable to your situation than others are.
If you’re lucky, one of your credit card or loan statements has your credit score on it. As a service to customers, many of the big credit card companies (and even some companies that provide loans for cars) list your credit score on your monthly statement or provide it via an online portal. Many of us tend to throw our credit card statements out without really looking at much past the overall balance statement, but keep an eye out as there could be good information on there.
If you’re struggling with credit and debt, a credit counselor might be able to get you your credit score at no cost. Credit counselors are generally non-profit workers whose job is to help individuals understand and deal with their credit problems. Your counselor may be able to not only order a free credit report, but also help you understand it and address any underlying financial issues you might have.
If you have a television and a pulse, you’ve probably seen plenty of ads for credit score services over the past decade. These services are usually Web-based, often advertised as being free. Maybe they are free, supported by sales of advertising or some other monetization mechanism. Often, though, the service is a gateway for signing you up for a credit monitoring service that will cost you a subscription fee each month just to get access to your supposedly free score. Likely, the credit monitoring service will on a free trial basis. However, be aware that after the trial period, the service will start charging you. Make sure you know what you’re signing up for and, if you don’t actually want the credit monitoring service, make sure that you cancel before the free trial ends.
The most direct way to get your credit score is just to purchase a credit report directly from FICO, which allows users to sign up and purchase their credit scores. Be aware though that the company may try to sell you things such as credit protection or safeguards against identity theft. While these services can be useful, be advised that you don’t actually have to purchase them in order to get your report.
My credit score is rising! Now what?
If you’re riding the wave of rising credit scores like so many of your fellow Americans, then you can expect that the credit available to you will rise as well. This is especially true if you’re seeing a credit black mark such as a foreclosure or bankruptcy come off your credit report. You may now be eligible for a home or auto loan that otherwise you wouldn’t have been able to get.
You’re also likely to see the available credit in your credit lines rise as well. Your credit card companies will notice your improved credit score and offer you even more borrowing ability.
Our advice is to be careful. While more credit can often be a good thing, you have to make sure to use it responsibly. It can be easy to let credit get away from you, and as interest continues to compound, the problem only gets worse. Spend responsibly, pay off your balance, and don’t try to live outside of your means.
If you do find that your credit card debt is spiraling out of control, National Debt Relief can help. We’re well reviewed, and we’ve helped many individuals with debt issues get a handle on things. Let us know how we can help you!