Average FICO score hits another record high

In early 2020, I would have cried foul if you had told me that we would be more than 17 months into the COVID-19 pandemic (ugh – that alone would have been shocking) and yet the average credit score would be up substantially. And it’s not just that: Stocks and home values have also surged while delinquencies and defaults have fallen sharply.

That’s a very unusual environment during any economic downturn, let alone a once-in-a-century health crisis that brought with it the highest unemployment level since the Great Depression. Of course, everything about COVID has been unusual, including the fact that the National Bureau of Economic Research deemed the recession to be the shortest on record (a mere two months, from February 2020 to April 2020).

It’s important to note that the economic recovery has been very uneven. While the unemployment rate has fallen from 14.7% in April 2020 to 5.4% at last check, according to the Bureau of Labor Statistics, it’s still much higher than the 3.5% observed in February 2020. That translates to 6.1 million fewer employed Americans.

There’s still a lot of economic pain out there, unfortunately. Much of it has been concentrated in the service sector and among households that entered the pandemic with lower wages and less savings.

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Many have weathered the crisis just fine

A lot of people, especially those who were able to work from home, continued to draw steady paychecks. Plus, most Americans spent less and received thousands of dollars in government-issued stimulus payments, enabling them to save more and pay down debt. Revolving credit balances, which primarily reflect credit cards, were still 9.6% below their February 2020 peak in June 2021, according to the Federal Reserve. And that was after two straight months with significant increases.

The macro trends have generally been quite positive, which again belies the struggles of so many. Overall, according to FICO, the average FICO credit score currently sits at 716, which is five points higher than it was in late 2020.

Some of the improvement is artificial

Federal student loan payments have been paused since March 2020 and this initiative was recently extended through Jan. 2022. Mortgage forbearance has been readily available, and federal and local eviction moratoria have provided some relief to renters. Some credit card issuers and auto lenders have granted hardship waivers on a smaller scale.

Most Americans have received three rounds of direct stimulus payments (the grand total for a family of four was up to $11,400). Other government programs, such as the Paycheck Protection Program, incentivized employers to keep workers on their payrolls. Expanded unemployment benefits have been critical as well.

All of this helps explain the increase in the average FICO score

For instance, FICO found that just 15% of the population had a 30-day late payment from April 2020 to April 2021, down from 19.6% in the preceding 12 months. Payment history is the most heavily weighted factor in the credit scoring formula. If you had permission to pay less or to pay nothing at all for a time, then you weren’t counted as late, as long as you were up-to-date beforehand.

The second-biggest category is how much you owe, and declining credit card balances indicate improvement in this area.

Another development that has aided consumers’ credit scores is that fewer have applied for new credit. FICO reported a 12.1% year-over-year decrease in hard inquiries. Applications for credit can be well warranted, but too many within a short span can drag down your score. Each account opening also lowers the average age of your accounts, which can negatively affect your credit score.

We couldn’t have foreseen any of this when the pandemic started

The knee-jerk reaction was to expect a massive rise in delinquencies and defaults, since that’s what normally happens when unemployment spikes, and April 2020 represented a doozy of a spike. Government assistance came fast and furious, and consumer behavior adapted quickly, too.

While the pandemic has led to increased inequality, at least as measured by income and net worth, the credit score improvements have been distributed more broadly. Some 75.3% of FICO scores are at least 650, up 2.9 percentage points from the previous year, according to FICO.

What this means for you

While the definition of a prime borrower varies depending on the financial institution and the product you’re applying for, somewhere in the 650 to 670 range often represents an important cutoff between being approved and denied, especially for credit cards. The average score of 716 is in the ballpark for the best terms on credit cards. Depending on the issuer, that line is often drawn somewhere between 720 and 740.

A year ago – heck, even a few months ago – credit card companies had much stricter application standards. While COVID hasn’t gone away, banks’ fears of delinquencies and defaults have lessened dramatically, and lucrative sign-up bonuses and money-saving 0% introductory balance transfer offers have returned en masse. If you’re among the many Americans with an improved credit score, it’s a great time to apply for a new card.

See related: What is a good credit score?

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.