Credit scores are rising: How not to get left behind
As issuers tighten credit access, a below-average score could reduce your options
Writes regularly about personal finance and health
Consumers’ credit scores are rising on average, but many who are mired in lower score ranges now find their credit options are dwindling.
The average FICO score reached an all-time high of 704 in September 2018. When you look at the big picture, that’s a good thing, says Can Arkali, principal scientist at FICO.
“Consumers are now in a better position to apply for and acquire credit with more favorable terms. It’s also a good thing for the lenders because they now have a bit more confidence in the consumer’s ability to take on that additional credit,” Arkali says.
“Rising credit scores are also a sign that the economy’s stronger,” Rod Griffin, director of consumer education and awareness for Experian, added.
However, card issuers use FICO scores to assess the level of risk that they take on when extending credit. When issuers extend credit to those with FICO scores below 720, “you’re going to be accepting a lot more risk on it,” said Brian Riley, director of the credit advisory service at Mercator Advisory Group.
Since lenders now have a larger pool of credit applicants with higher credit scores, the question is whether they’re less likely to extend credit to those with lower scores. Some recent studies suggest the answer may be "yes."
See related: 10 tips to improve your credit score in 2019
Inside the subprime market
One way to gauge the impact of rising credit scores on those with less than stellar credit is to look at how the subprime market has changed in recent months.
The subprime market consists of consumers whose FICO scores are less than 620. Near-prime credit scores are those between 620-659. Prime credit scores are those between 660-719, while super-prime scores are the best of the bunch – 720 and above.
An October 2018 report by the Federal Reserve found credit card issuers were less likely to approve credit card applications from subprime borrowers than they were in the beginning of this year.
The number of new subprime accounts has also been decreasing. The American Bankers Association’s Credit Card Market Monitor, released in October 2018, found the number of new credit accounts in the second quarter dropped by 3.5 percent from a year ago, largely due to a fall in the number of subprime accounts. Average credit lines also fell 0.4 percent for new prime accounts and 1.3 percent for new subprime accounts, while credit lines increased 0.2 percent for super-prime accounts.
“The industry continues its diligent approach to credit underwriting, which is reflected most recently in declines in average credit lines for prime and subprime borrowers,” said Jess Sharp, executive director of the ABA’s Card Policy Council, in a statement.
But the news isn’t all bad for subprime borrowers. In the automotive market, subprime lending has been very strong, Griffin says. One reason could be the fact that lenders must compete harder for business since more people are qualified, Griffin says. “So they start looking at people whose scores aren’t quite as good.”
Work to improve your score as issuers get more risk-averse
While some lenders may have less of an appetite for the risks associated with lower credit scores, the market for subprime credit products is unlikely to disappear entirely.
“Banks will always try to reach as many consumers as possible,” says Arkali. “They have different business objectives and so many different products to offer.”
But even so, consumers will benefit from lower rates and better terms if they can reach prime and super-prime status. The best way to do that is to stick to what Arkali calls the tried-and-true recipe for maintaining a good score:
- Consistently pay your bills on time.
- Lower your debt as much as possible.
- Apply for credit only when needed.
Subprime borrowers may also benefit from the UltraFICO credit score, a new scoring system introduced by FICO, Experian and Finicity this year. The new score, which will be rolled out in early 2019, looks at data such as banking habits to paint a broader picture of consumers’ financial history.
Experian also has introduced Experian Boost, a service that lets consumers voluntarily choose to have their utility bill payments added to their credit history.
“We see that as really being effective for people with thin credit files, or with near prime or subprime credit scores, 680 or below,” Griffin says.
While the amount of risk credit issuers are willing to take on will always fluctuate, you can benefit from improving your score.
“Lenders are always looking for ways to expand their market, but they want to do it responsibly and manage their risk effectively,” Griffin says.
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