Defaults Are Rising, Credit Scores Are Falling
Bottom Line: On the one hand debt management and credit scores commonly go hand in hand. So that the most recent reporting shows default rates on consumer debt rising at the same time the average credit score has been falling isn’t much of a surprise. However, it is notable. The average credit score had gone in one direction for over a decade – up. That’s happened despite two recessions during that time – the pandemic lockdown induced recession of 2020, and the technical inflation fueled recession in the first half of 2022. There are multiple factors that have helped prop up credit scores in recent years. They’ve included the postponement of certain debt payments and financial obligations during the pandemic, in addition to direct federal assistance that was paid out to tens of millions of Americans. More recently, starting in April of last year, unpaid medical debt of less than $500 was also removed from the criteria that can negatively impact credit scores. But while credit scores had consistently trended higher, something else has too. Overall debt.
Total household debt in the 4th quarter of 2023 rose by $212 billion, in just that three-month period alone, and a quarter of it was credit card debt which now stands at a record $1.13 trillion. A new report from FICO shows that we may have reached a breaking point with the amount of consumer debt we can balance as a country.
The latest FICO data reveals that in the 4th quarter of 2023 the average credit score declined from a record high of 718 to 717 – which is obviously still a good score. However, prior to the previous quarter you had to go back to the 4th quarter of 2013 to find the previous time the average credit score declined. And the primary reason for the decline is a sign of rising consumer stress.
According to FICO’s report the average credit card utilization rate, or the percentage of available consumer credit that’s being used, has risen to 35% from 33% a year ago while late credit card payments (defined as those more than 30 days past due), rose by a similar percentage to 18%. Credit card defaults have historically been the first sign of a bigger issue. According to the Federal Reserve credit card delinquency rates are now the highest they’ve been since the 4th quarter of 2011 – when the average consumer was still in recovery mode from the Great Recession. The number of delinquencies has risen by 37% year-over-year.
With historically high employment levels what these numbers reflect is the impact of multiple years of historically high inflation. Since the onset of the Biden administration the average American, net of inflation, is 3% worse off financially. With credit scores dropping for the first time in ten years, and credit card delinquencies now at their highest levels in twelve years, there are new signs of consumer stress showing up in our economy. What’s different is that this time around they haven’t coincided with a recession. However, given that consumers account for about 70% of the US economy, it’s possible that it could be a precursor to one coming.