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Given the seemingly daily notice of bad news about the current status and near-term outlook of the U.S. economy, one could logically assume that consumers’ credit scores have also experienced a corresponding downturn.

A recent study published by FICO shows this is not the case. In fact, their report illustrates that the distribution of FICO scores for the U.S. population has remained relatively stable between 2005-2011.  It seems a bit counter-intuitive at first glance, but it makes sense when you think about it more thoroughly.

  • For a large percent of the population, the macro-level economic conditions have relatively little effect on how they manage their credit—which means their credit seeking, usage and payment behaviors will remain the same.

While it is true that loss rates are at record levels with mortgages (~9% vs. ~1% pre recession period), the overwhelming majority of homeowners continue to pay their mortgage loan on time.  In addition, credit card delinquencies and late payments on automobile loans are at historically low levels.  Therefore, there is relatively little change in credit scores over the time periods for a large percent of people.

[Related Article: How “Good” and “Bad” Credit Affect Your Credit Score]

  • Generally speaking, in recession conditions one could expect more movement in the tails of the score distribution.  Existing high scoring/low risk consumers become even more conservative, tending to pay down credit obligations more aggressively, avoid applying for new credit and increase their savings, as a preventative measure should they run into a rough patch, such as a temporary loss of employment.  These actions will tend to increase their credit scores—so high-scoring consumers score even higher.
  • At the same time lower-mid scoring/higher risk consumers (scores in the mid 500s to high 600s) tend to already be on the edge (carry higher balances, may have incidences of missed payments) and are not in as good of a position to weather a negative event such as a temporary loss of income due to being laid off, or being able to cover an unexpected large expense item such as a large car repair bill.  In addition, it is more difficult for these consumers to get new credit as a means of tiding them over as lenders tend to tighten their credit criteria when times get tough.  Therefore, there is a shift toward lower scores for this segment.

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The FICO study illustrates this dynamic, comparing the shifts between 2005-2008 (when the recession was in full swing) and a slight movement back away from the tails towards the middle of the score distribution as the economy moved out of the heart of the recessionary period between 2008-2011.

Note, the report illustrates macro-level score distribution changes, and one should not interpret this to mean that individual scores have not changed over these time periods.  Individual consumer scores are moving up, down or remaining relatively unchanged over these time periods based on how their credit behaviors have evolved over time. It would be interesting if we could see more detailed insights of the score migration patterns during this time; for example, indicating where those currently scoring 650-699 in 2011 scored in 2008. Did more move up from lower scores, or did more migrate down from a higher score in 2008?

Lenders will typically conduct similar analysis on their portfolios and use this trending information to help guide their future credit granting criteria and strategies, which impacts how easily U.S. consumers can get credit.

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