You don’t have to look far to find troubling financial news. Whether it’s excessive student loan debt or an increase in credit card delinquencies, it seems like there’s never any good news coming out of the consumer finance world.
When it comes to credit scores, however, the news is actually quite encouraging. In fact, the average credit score is going up and a surprisingly large number of people have great credit scores.
Both FICO and VantageScore routinely keeps tabs on the country’s average credit scores, also known as a score distribution. According to FICO, America’s average credit score has been trending upward for around a decade. In fact, in 2017 the average FICO score topped 700 for the first time in history. And, according to VantageScore, the average VantageScore credit score is 675, and 35% of its scores are above 760, which is an elite score using any definition.
Why Credit Scores Are Higher
It is not a surprise that the meltdown from a decade or so ago coincided with a drop in average consumer credit scores. In October of 2009 the average FICO credit score in the United States dropped to 686. Prior to the peak of the housing crisis, 18 months earlier in April of 2008, the average FICO score had been 690.
Since the recession, the average score has been steadily climbing upward. Why? There are certainly many factors that contributed to the increase, but the bottom line is credit scores have increased because our collective level of credit risk has improved, and our credit reports are cleaner.
Less Risk = Better Credit Scores = Cheaper Credit = More Disposable Income
Both VantageScore and FICO’s credit scoring models are designed to help lenders and other companies predict risk. The stated design objective of these credit bureau-based scoring systems is to predict the likelihood that a consumer will pay 90 days late or worse on any credit obligation within the 24 months after their score is calculated. That’s called a Performance Definition.
When actions on your credit reports indicate that your level of risk has improved, credit scoring models reward you with higher credit scores. For example, if you previously had late payments on your credit reports, but you’ve been on time with all of your bills for the last few years, your credit scores will climb slowly over time.
According to FICO, the following factors have contributed to the rising average score:
- Fewer people have serious delinquencies on their credit reports in the last two years. Remember, payment history is the most important component of your credit scores, accounting for around 35% of your score points. With the number of serious delinquencies on credit reports decreasing, it makes perfect sense for scores to be on the rise.
- Fewer people have minor delinquencies on their credit reports in the past year. FICO considers not only the number of delinquencies on a credit report, but the recency of those delinquencies as well. According to FICO, repayment behavior by consumers has been improving overall.
- There are fewer collection accounts on credit reports. Normally collection accounts are bad for your credit scores. This drop in the number of consumers with collection accounts is one more reason for the average FICO score improvement.
- Fewer people are applying for new credit. This is somewhat of a surprise. There are fewer credit pulls from lenders, and therefore fewer “hard inquiries” on people’s credit reports. That equals lower risk, and higher scores.
That’s just the average though — has your credit score risen in the past few years? If you’re trying to improve your credit, here’s a 12-month plan to get your score in good shape, and a trick to give your credit score a quick boost.
- What’s a Good Credit Score Range?
- How to Raise Your Credit Score
- Here’s How Much the Average American Pays in Interest Each Year
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.