The National average FICO Score has dropped for the first time in over a decade. Find out the reason behind it and what it means!

For the first time in ten years, the national average FICO Score has decreased, raising concerns for consumers and lenders. It shows a shift in credit behavior, potentially linked to current economic trends.

While the decrease might seem minor – from 718 to 717, according to FICO – it marks a significant turning point, as this score is a crucial factor in determining your creditworthiness, impacting everything from loan approvals and interest rates to insurance premiums and even job opportunities. Let’s talk about the reasons behind this drop and its potential consequences.

Why is the National Average FICO Score Dropping?

Experts point to several factors that might be contributing to its decline:

• Increased Utilization Rates: credit report data suggests that consumers are carrying more debt relative to their credit limits. This rise in credit utilization – the percentage of your available credit you’re using – can negatively impact your credit score;
• Shifting Consumer Habits: the pandemic’s economic disruption might have led to changes in how people manage credit. With job losses and income uncertainties, some consumers might have relied more heavily on credit cards to make ends meet;
• Rising Interest Rates: the Federal Reserve has begun raising interest rates to combat inflation. This could make it more expensive to pay off existing debt, potentially leading to delinquencies and lower credit scores.

What Does This Mean?

When the national average FICO score drops, it can impact lenders as well. Lenders might become more cautious when issuing credit, potentially making it harder for some consumers to qualify for loans or mortgages. Keep in mind that, Lenders might consider other factors like your income, employment history, and debt-to-income ratio. This emphasises the importance of being proactive about managing your credit health to ensure you have access to credit when you need it. Here are some steps you can take:

• Monitor Your Credit Score Regularly: keep an eye on your credit score to identify any potential issues early on. You can access credit reports from each of the three major credit bureaus (Experian, Equifax, and TransUnion) or once a year through AnnualCreditReport.com;
• Maintain Low Credit Utilization: aim to keep your credit card balances well below your credit limits. Ideally, you should strive for a utilization rate below 30%;
• Make Timely Payments: payment history is the most significant factor influencing your credit score. Missed or late payments can significantly damage your creditworthiness;
• Reduce Overall Debt: work towards paying down existing debt to improve your credit utilization ratio and overall financial health;
• Consider Credit-Building Strategies: if you have a limited credit history, explore options like secured credit cards or becoming an authorized user on someone else’s account (with their permission) to build positive credit.

What Is a FICO Score?

It is a three-digit number that summarizes your creditworthiness. It’s created by the Fair Isaac Corporation (FICO) and is widely used by lenders in the United States to assess your credit risk. The higher your FICO score, the better. It means you are more likely to repay a loan on time. This translates to better loan terms, such as lower interest rates and higher approval odds.

FICO Scores are calculated using information from your credit reports, such as:

• Payment history (around 35% weightage): is the most significant factor and considers how timely you’ve made payments on credit cards, loans, and other obligations;
• Amounts owed (around 30% weightage): this looks at your total debt compared to your available credit limit. Ideally, you should keep your credit utilization ratio low (below 30%) for a positive impact;
• Length of credit history (around 15% weightage): the longer your credit history, the better, as it demonstrates responsible credit management over time;
• New credit (around 10% weightage): applying for too much new credit in a short period can raise a red flag for lenders, potentially lowering your score;
• Types of credit used (around 10% weightage): having a mix of credit accounts, such as credit cards and installment loans, can positively impact your score.