FICO scores predict the probability that a borrower will default on a loan. They run from 300 — indicating that the individual is extremely high-risk — to 850, meaning almost no risk of default. A score of 704 is considered good and, along with other favorable factors in your application, will help get you approved for a mortgage — although not necessarily at the lowest interest rate and fees available. A score of 750 will get you primo rates and terms, but a 450 will probably get your application tossed. In the mortgage arena, FICO scores are used by virtually all lenders, and are the only scores that two mega-investors Fannie Mae and Freddie Mac accept. They are also used extensively for credit-card, auto-loan and other loan applications.
FICO periodically studies a 10-million-person sample of the more than 200 million consumers whose credit histories are on file at the three national credit bureaus. In 2009, the average score of consumers nationwide was 686. Since then, average scores have been improving gradually along with the economy, lower unemployment and rising incomes. The five-point increase from 699 in 2016 to 704 this year is one of the largest two-year improvements on record.
A few noteworthy trends jump out of FICO’s latest data on Americans’ scores:
● Age matters. Young people (18 to 29 years old) tend to have lower scores than other age groups — they score an average of 659. Part of the reason may be that many of them have “thin” files with relatively few credit accounts or transactions in their histories. When they fail to make payments or pay late on a credit card, the event weighs more heavily on their score than it would if they had longer histories with more accounts. The average score for people ages 40 to 49 is 690, and for seniors 60 and older it’s 747.
●Fewer people are hobbled with collection accounts. When you don’t pay back what you borrowed, your lender may hire third-party collectors to track you down. That gets reported to the credit bureaus and can depress your FICO score for years. Twenty-eight percent of all Americans had collection accounts on their credit files in 2015; today, it’s just 23 percent.
●Rock-bottom FICO scores are fewer. In 2009, 7.3 percent of American consumers had terrible scores, ranging between 300 and 499. Now that’s down to 4.2 percent. In 2009, 8.7 percent of consumers scored between 500 and 549; today, it’s down to 6.8 percent. Overall, fewer Americans now have FICO scores below 650 than in previous years. In 2009, just under 35 percent of consumers scored 649 or less; today, it’s 28.7 percent.
●Super scorers are increasing. A record number of Americans — nearly 22 percent, more than 1 of every 5 — now have FICO scores of 800 and higher. Forty-two percent score between 750 and 850.
●Mortgage borrowers’ scores are dropping. Although FICO scores for most categories of consumers are up, average scores for people taking out home mortgages are sliding in the opposite direction. In 2009 and 2013, borrowers had average scores of 745; now, they’re down to about 733. This may seem odd, but FICO says it shows that lenders are relaxing their approval standards slightly to include a broader range of borrowers: people with thin files, dings in their credit histories and higher debt-to-income ratios. Think millennial first-time buyers and people who hit a rough patch during the Great Recession.
What to make of the latest FICO numbers? Lessons learned from the housing bust and the recession clearly are having impacts on consumers’ scores and behavior. Dornhelm believes that more Americans have access to — and better understand — their credit scores than in previous years, and they’re avoiding doing things that can depress them, such as maxing out on credit cards.
If you’re smart, you’ve been doing the same.
Ken Harney’s email address is email@example.com.