Decline of FICO Average Score Points to Two-Tier Credit Market as Borrower Gap Widens Across Demographics

A slight decline in the national average credit score from 715 to 714 was reported, but this slight drop tells a much larger story.

Approximately 50% of Americans report their current credit scores as over 750 (a new historical record). FICO said, “The result is a credit market that’s both more challenging for some and more rewarding for others.”

This large gap between people who can easily obtain loans and those who cannot due to financial difficulties is the result of several major events, including the resumption of student loan payments.

With the sudden continuation of payment of these debts, numerous individuals with previously stable credit ratings saw those credit ratings lower immediately when they resumed making monthly payments.

The decrease in the average FICO score is primarily because those with low-end credit are again experiencing negative impacts from student loan delinquency reporting.

While many of these consumers stayed current during the forbearance period, when payments resumed, it wasn’t long before they fell behind and their scores declined. Some consumers experienced drops of approximately 60 points and were immediately pushed out of “prime” credit territory.

Gen Z has taken an especially difficult blow. Many Gen Z consumers will be paying off student loans for the first time, so they are most vulnerable to this development.

Approximately 14% of Gen Z consumers experienced a decline of 50 points or more. As a result of declining scores, a significant portion of consumers are losing access to lower-cost credit.

Restarting the payment of student loans was similar to an economic shock. During this time, borrower credit reports were in good shape. But once the payment reporting started again, many borrowers had their credit rating impacted by missing payments.

A new phenomenon is developing called “credit cliff.” Many borrowers who fall just below the prime threshold are being moved to subprime status, which can increase borrowing costs and reduce options for obtaining loans.

At this point, a borrower who would typically qualify for a standard credit card could now only qualify for one with a much higher interest rate.

This and the increasing number of mortgage delinquencies is mounting evidence that the rising borrowing costs are forcing many consumers to miss payments.

Lenders do not seem to be scaling back all at once. Rather, lenders appear to be more discerning with respect to their lending decisions and are extending a large portion of new credit to more qualified consumers.

In fact, we have seen an increase in loan originations among the best-rated consumers in card products, personal loans, and mortgage originations, as well as continued extension of credit, according VantageScore. 

VantageScore also reports that its average credit score has risen to 701 due to the strongest performance from top-tier consumers. This difference illustrates that these two models capture different aspects of the economy.

Delinquency rates among low-credit-tier consumers are beginning to rise, which indicates increasing risk. It appears that many lenders will begin tightening lending criteria or increasing interest rates charged to those consumers.

This trend will exacerbate the widening gap between the most financially stable consumers and the less financially stable consumers. The former group will find it easier to qualify for financing and obtain better rates than the latter group.

Although the average credit score may fluctuate marginally, the actual distribution of credit within the marketplace is undergoing significant changes.

This presents both risks and opportunities for businesses focused on subprime borrowers. Demand remains robust, but expect to see more volatility going forward. Understanding where your borrowers fall within your target population will be more important than ever before.