Just in Time for the Holidays... Credit 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 3rd quarter of 2024 rose by $147 billion, in just that three-month period alone, and a quarter of it was credit card debt which now stands at a record $1.17 trillion. The good news is that interest rates are on the decline, meaning the interest costs for variable rate debt like credit cards is slowly coming down a bit. The concern is that as we’re entering the peak of the holiday shopping season, we may be close to a breaking point with the amount of consumer debt we can balance as a country.
The latest FICO data reveals that the average credit score declined from a record high of 718 last year to 717 this year – which is still a good score. However, prior to what’s happened over the past year, you’d have to go back to 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.
Credit card defaults have historically been the first sign of a potentially 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 more than doubled over the past three years as the impact of the historically high inflation cycle has been felt.
Since the onset of the Biden administration the average American, net of inflation, is 6% worse off financially. With credit scores dropping for the first time in ten years, and credit card delinquencies now at their highest levels in thirteen 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, there’s a question about how much room there is in the budget for holiday shopping lists this year and the ability to pay for it in the new year.