Risk & Compliance US Credit Quality Continues To Climb – But Will It Level Off?

si-alpinist
Aug182015

According to the latest national distribution of FICO® Scores, US consumer credit quality has continued the slow-and-steady climb we’ve seen over the last few years.

April 2015 FICO Score Distribution

As we’ve observed for several years now, more consumers are scoring 800 or above—19.9% vs. 19.6% just six months earlier. And fewer consumers are scoring below 550. In fact, there’s been a clear pattern of decline in this segment since the low point of the economy in late 2009/early 2010. Some of this trend may be a result of the lowest-scoring consumers “dropping out” from traditional credit usage, and by extension no longer having valid FICO® Scores. Still, this decline is encouraging. It indicates that overall more consumers using credit are managing it responsibly enough to not be among the lowest scorers.

In addition, the national average FICO® Score is currently at an all-time high since we’ve been tracking this metric, dating back to pre-recessionary 2005. That said, the improvement in this average seems to be slowing, stabilizing around 695 after a steady climb between October 2013 and October 2014.

April 2015 Average FICO Score

We also looked at trends in consumer repayment and delinquency. There’s been a continued decrease in recent serious delinquencies (defined as 90+ days past due) across all credit products—from 19.4% in October 2013 to 18.2% in the most recent April 2015 timeframe. This is clearly a key driver behind the improvement we’ve observed in the score distribution over that period.

April 2015 Delinquencies by industry
DPD = Days Past Due

Note, however, that when we break down these delinquency trends by credit product, the decrease appears to be almost wholly driven by the real estate segment. This suggests that we are getting further and further from the worst of the housing downturn. By contrast, the auto and bankcard industries show relatively little, if any, drop in delinquency over the past few years.

An interesting finding emerges when we shift to a shorter-term view of delinquency trends—that is, delinquency in last 12 months as opposed to last 24 months. In this case, we see that the April 2015 figures are actually creeping up slightly relative to the October 2014 stats.

April 2015 Delinquencies 12 months

In summary, the national FICO® Score distribution continues to improve, although we are starting to see evidence—both in average score as well as delinquency measures—of a “leveling off” in credit quality. We will, of course, closely monitor this trend to assess: Does it represent a brief pause in the continued US financial recovery? Or indicate that cracks are starting to show at the edges of what has been for several years now a relatively low-risk underwriting environment?

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