The average FICO credit score in the U.S. experienced a decrease towards the end of last year, marking the first drop in a decade. According to Can Arkali, FICO’s senior director of scores and predictive analytics, the average score fell to 717 in October, down one point from six months prior. Additionally, the percentage of consumers with late bill payments increased to 18% in October, up from 17% earlier. The average credit card utilization ratio also rose to 35% from 34%.
Consumers are facing challenges as higher prices reduce their purchasing power, leading more individuals to rely on credit for daily expenses. Simultaneously, soaring interest rates are making it more difficult for people to manage their finances. The average credit card interest rate reached 21.5% in May, up from 15.1% two years ago. Missed payments on bank cards have surged and surpass pre-pandemic levels, according to Arkali.
Making timely payments is the most significant factor in credit scores, accounting for 35% of the overall FICO calculation. Credit card utilization, which constitutes about 30% of the score calculation, is the next most important component. Bryan Sullivan, the chief operating and financial officer at IDIQ, emphasized the importance of paying bills on time and in full for maintaining good financial health and a strong credit score. A lower credit utilization ratio indicates to potential lenders that consumers are not financially overstretched.
Total credit card debt in the U.S. reached $1.12 trillion in the first quarter, a 13% increase from the previous year, as reported by the Federal Reserve Bank of New York. Approximately 8.9% of credit card balances were newly delinquent in the first quarter, the highest level in 13 years. After years of inflation surpassing the Fed’s 2% target rate, recent data shows a slowdown in inflation. The Consumer Price Index indicated a 3% increase in June from a year earlier, the slowest rate since March 2021.
Federal Reserve Chair Jerome Powell stated to Congress that although inflation has decreased over the past few years, it remains above the Committee’s long-term goal. Powell mentioned that continued positive data would boost confidence that inflation is on track to sustainably reach 2%. The recent data on inflation suggests a potential relief for consumers who have been grappling with high prices and increased financial strain. As the economy continues to evolve, maintaining healthy financial habits such as responsible credit card usage and timely payments will be crucial for individuals looking to strengthen their credit scores amid changing economic conditions.
