Americans’ Credit Scores Resilient Against Rising Card Debt & Delinquencies

Credit Scores Resilient Against Debt And Delinquencies

When people are unemployed or underemployed, they often use their credit cards to bridge their income gap. Credit cards offer immediate access to a potentially substantial line of unsecured credit that, when paid back in full before the due date, is interest-free. That’s the good news. 

The bad news is when consumers get into too much credit card debt, there is a real possibility it can have a negative impact on their credit scores.

Credit Card Debt is at Historic Levels

The average amount of credit card debt increased by $45 billion dollars between Q1 and Q2 of 2023, according to Fortune, Federal Reserve Bank of New York data, and TransUnion. That eclipses the trillion dollar mark and amounts to an average balance of just over $5,700 per cardholder with a credit card balance. By Q3, the average balance per cardholder had exceeded $6,000. 

Credit Card Debt Trends 2020 – 2023

Credit Card Lending Metric (Bankcard)Q3 2023Q3 2022Q3 2021Q3 2020
Total Credit Card Balances$995 billion$866 billion$727 billion$723 billion
Average Debt Per Borrower$6,088$5,474$4,857$5,068
Number of Consumers Carrying a Balance168.6 million163.9 million156.1 million149.4 million
Source: TransUnion

Interest rates on credit cards vary, of course. They vary primarily based on the credit score of the applicant. For those with anything other than excellent credit scores, the interest rates on credit cards are going to be in the 20% or higher range. 

When you couple these interest rates with increasing credit card debt, the outcome is more expense to “service” your credit card debt.

Of course, there is not a universally grim outlook for those who use credit cards and those who have large average monthly balances. As I alluded to earlier, interest on credit cards is optional

In fact, it is pretty much the only extension of credit where interest can be entirely avoided by simply paying the balance in full before the due date. If you use cards this way, then the interest rate is irrelevant, and you are essentially enjoying a series of free short-term loans from your credit card issuers.

I make that point because I have long believed credit cards and credit card issuers are unfairly vilified for their interest rates and business practices. I think it is fair to make the point that the interest is entirely avoidable if you are smart about how you use their products.

Credit Card Delinquencies Are Also Up

Credit card delinquencies are not just up — they are way up. According to data from TransUnion, the rate of credit cards that were past due by 90 days or more in the third quarter of 2022 was 1.94%. Credit cards past due by 90 days jumped to 2.34% as of the third quarter of 2023. 

Credit Card Delinquency Trends 2020 – 2023

Credit Card Lending Metric (Bankcard)Q3 2023Q3 2022Q3 2021Q3 2020
Borrower-Level Delinquency Rate (90+ DPD)2.34%1.94%1.13%1.23%
Number of Credit Cards in Circulation537.9 million510.8 million474.2 million451.9 million
Source: TransUnion

When you couple an increase in the average credit card balance with an increase in the delinquency rate, you can reasonably assume the average amount past due on delinquent credit cards will also go up, as the minimum monthly payment requirement on cards is around 2% of the outstanding balance. When the balance goes up, so does your monthly payment requirement.

This is, of course, the bad news. First off, being past due on any obligation is bad. But when you are past due on extensions of credit, then your credit reports and credit scores come into play. And TransUnion’s use of a 90-day delinquent metric in its study is even more meaningful for two reasons.

First, credit reporting guidelines prevent the credit reporting of late payments that fall between 1-29 days late. That means there is no systematic method of reporting someone as being late on an account until they are a full 30 days past the due date

Of course, 90 days late is well past 30 days late so the credit reporting of 90 days late is entirely appropriate and common.

Second, in credit scoring systems, particularly the FICO branded credit scores, 90 days late is a meaningful threshold as it represents a major derogatory event. Major derogatory events are more problematic for your FICO scores than minor derogatory events, such as an isolated 30-day late payment.

Despite this, the Average FICO Score Rose by 2 Points

With all of this bad news about credit card debt and credit card delinquencies, you would expect the average FICO score to be going down. It is no secret that an increase in credit card debt and delinquencies can cause damage to your credit scores, regardless of the brand of credit card. 

The fact is, the average FICO score actually went up in 2023 amid all of this credit card debt and delinquency turmoil. The average FICO score as of late 2023 was 718, which is an increase from the average FICO score of 716 in 2022. 

Average FICO Score 2020 – 2023

April 2023October 2022April 2022October 2021April 2021October 2020
Source: FICO

So, what gives? Shouldn’t the average FICO score have gone down in 2023? Not really, and there are several contributors and explanations for this increase. We’ll address two of them.

First off, there are over 220 million people in this country with credit reports. Most of those credit reports meet the minimum data requirement to qualify for a FICO score. This means a massive number of people in this country have FICO scores. 

Because of the sheer size of the data sample, it takes a truly seismic change in the credit reporting databases to move the average FICO score, even by one or two points. 

Case in point, do you remember the Great Recession of 2007-2009? Unemployment was incredibly high. The stock market had tanked. Real estate values plummeted. Foreclosures spiked. It was nearly impossible to get a mortgage loan. The news was all bad. 

But in the midst of all of that, the average FICO score went down only 4 points and had fully recovered by Q2 2012. The point being, even with massive economic changes, the average FICO score does not change by much. This 2023 data and FICO score response is another example of that.

Second, the U.S. consumer is incredibly resilient and, generally, low risk. From my perspective, when people talk about average FICO scores and the degradation of aspects of the U.S. economy, they tend to take a pessimistic glass-half-empty approach. I guess that translates into clicks, but it is also misleading.

The percentage of people with FICO scores below 700 went down when you compare 2023 to 2022. Where did they go? The answer is simple, they now score higher than 700. The percentage of people who scored between 750-799 stayed the same across 2023 and 2022. 

And here is the best news, the percentage of people who scored above 800 went up considerably in 2023 compared to 2022. When you add all of this up, this is why the average FICO score went up in 2023.

What’s Next?

I recognize all of these studies and statistics are very macro in nature, as in, they are a view of the whole rather than of the one. Our individual stories and circumstances get forgotten in the macro perspective. 

Consumers who have poor credit scores do not care about the average FICO score of the United States population going up two points to 718. They care about how they can get to 718.

The answer is the same as it always is. To get to 718 and higher, you have to avoid what is the subject of this article, which is increasing credit card debt and delinquencies. Those two things can be very problematic for the individual consumer and their credit reports and credit scores. If you can maintain lower credit card balances across fewer cards and never ever miss payments, then your credit reports and scores will be fine.

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