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Reduced Revolving Debt: A Key Driver of Improved FICO Scores During Pandemic

We recently shared that the national average FICO® Score increased to 716 (as of April 2021). Our blog post on the subject highlighted that consumers in the lower score ranges were the biggest driver of the upward trend from 708 in the prior year.

For example, for those consumers who had a FICO® Score value between 550-599 as of April 2020, their average score went up from 575 as of April 2020 to 596 as of April 2021. In contrast, those consumers who had a FICO Score value between 750-799 as of April 2020 have seen virtually no movement in their average score.  While it is typically the case that lower scoring consumers are more likely to show year-over-year improvements in average FICO score, it is the magnitude of the upward shift after the onset of the pandemic that is notable.  As shown in Figure 1, which compares the year-over-year average FICO Score change between April 2020 and April 2021 to a pre-pandemic benchmark, the most significant uptick in year-over-year avg FICO score changes during the pandemic occurred in the lower FICO Score ranges.

Change in average FICO Score 8 by Score Brand
Figure 1: Change in average FICO® Score over a 1-year period, for all score ranges

To examine why lower scoring individuals saw such a big jump in the first ~12 months of the pandemic, we profiled consumers with a FICO® Score 8 that was less than 700. While some might believe this increase for consumers in lower score ranges are only occurring because of payment accommodations mandated by the CARES Act and otherwise granted by lenders, we found two key drivers for the increase in scores:

Significantly fewer missed payments. The most important category in the FICO® Score calculation is payment history, including whether a consumer has recently missed payments. We found that 21.4% of consumers in lower score ranges had a delinquency in the last six months, compared to 28.3% one year prior. This a 24.5% year-over-year reduction.

Months Since Delinquency for Consumers with FICO Score 8 < 700 1 Year Prior
Figure 2: Months since delinquency for those with FICO® Score less than 700

Paying off credit cards. The second most important category of the FICO® Score calculation is amounts owed. Consumers with a FICO® Score of less than 700 reduced their revolving debt balance by 17% from April 2020 to April 2021, compared to only a 5% reduction the previous year. By reducing their revolving debt, they lowered their credit utilization ratio (credit card balances divided by credit limits), which is an important factor in this category. Having large credit card balances may mean that a consumer is overextended, and more likely to miss payments. On the other hand, empirical analysis of millions of credit files finds that people with lower debt and credit utilization levels are less likely to miss payments, and so the FICO® Score reflects this.

Average revolving balance over time for those with FICO® Score less than 700
Average revolving balance over time for those with FICO® Score less than 700

Here are some reasons why consumers were more focused on reducing their credit card debt:

  1. Reduced spending because of pandemic-related restrictions on travel and entertainment, along with a more judicious mindset because of the economic uncertainty created by the pandemic.
  2. Increased savings from stimulus checks and other government benefits during the pandemic.
  3. Increase in consumer awareness around credit reports and credit scores that has occurred during the pandemic.

Figure 4 shows that 53% of consumers in lower score bands (over 27 million consumers) reduced their balances in the past year, while only 43% did so in the previous year.

Total Revolving Balance Change Over 1 Year Period for Consumers with FICO Score 8 < 700 at Start of Period
Figure 4: Total revolving balance change for those with FICO® Score less than 700

On the flip side, 38% of consumers in lower score bands had a revolving balance increase over the past year, versus 50% in the previous year. So while there was a shift toward consumers being able to pay down their credit card balances because of the reasons mentioned above, there was still a sizeable portion of this population who incurred additional credit card debt, possibly to make ends meet because of pandemic impacts.

Another observation of note, fewer consumers in lower score ranges were actively seeking credit. Only 45% of those with a FICO® Score less than 700 had a hard credit inquiry in the last year versus 49% in the previous year. Hard credit inquiries represent instances where a credit file was requested by a lender in response to a consumer-initiated application for credit. This dip in credit seeking behavior likely goes hand-in-hand with the renewed consumer focus on reducing spending and paying down debt. Plus, if they received government stimulus funds, they may not have needed to open additional lines of credit, such as a personal loan, to cover their expenses.

While we observed that the consumers with lower FICO® Scores showed increases to their scores more in the past year than what is typically seen, it’s not only because payment accommodations reduced the likelihood of delinquency. It’s also because of other, tangible improvements in their financial situation and credit profile, such as reductions in credit card debt.

Check out this blog on myfico.com for more information on how to improve your FICO® Score.

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