March 7th 2024.
Recent data from Money Talk News has revealed concerning news for the economy. It seems that for the first time in ten years, the national average FICO credit score has decreased. This decline, down one point to 717 out of 850, was reported by Fair Isaac Corp., also known as FICO. This shift in credit scores, a departure from the usual upward trend seen since 2013, has grabbed the attention of financial experts and analysts.
FICO has attributed this decline to the ever-changing nature of credit scores. They suggest that the combination of inflation and higher interest rates has had a negative impact on consumers. As a result, missed payments and increased levels of debt among borrowers are playing a significant role in this shift.
The statistics from October 2023 are not reassuring. They show that about 18% of the population had at least one credit account with a past-due payment of 30 days or more in the previous year. This is a significant jump from the 4% recorded in April 2023. Additionally, the average credit utilization ratio has also increased, rising from 34% in October 2019 to 35% in October 2023, just before the COVID-19 pandemic hit.
Perhaps the most alarming fact is that credit card balances in the United States have surpassed $1 trillion as of October. On average, each person carries a balance of about $3,100. The implications of this decline in credit scores, especially during these uncertain economic times, are significant. Experts warn that lenders may reassess the risk involved in lending, which could lead to changes in interest rates and loan approvals.
So, what can individuals do to address the potential consequences of this credit score decline? Experts recommend taking proactive measures. It is crucial to understand how credit scores are calculated, with payment history and amounts owed being the most significant factors. Payment history, making up 35% of FICO scores, highlights the importance of making timely payments on credit cards, installment loans, and mortgages. Even one late payment can have a detrimental impact, making a consistent track record of on-time payments essential.
The second most influential factor in credit scores is "amounts owed," which takes into account outstanding balances on installment loans and revolving accounts such as credit cards. The credit utilization ratio, which shows how much of the available credit is being used, is a critical metric in this category. Experts advise against closing unused credit card accounts, as this reduces the available credit, increases the credit utilization ratio, and could potentially damage credit scores.
As the nation grapples with this unexpected decline in average credit scores, individuals are encouraged to assess their own credit standing, understand the factors affecting their scores, and take proactive steps to maintain or improve their creditworthiness. With 2024 approaching, it is essential to be mindful of our credit scores and take steps to ensure their stability.
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