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Record High Credit Scores and the Impact on Economic Activity

Record High Credit Scores and the Impact on Economic Activity

In April the average credit score reached 700 – the highest since 2005 when Fair Isaac (creator of widely used FICO credit scores that range from 300 to 850) began tracking the data.  Meanwhile the share of consumers deemed to be riskiest (those with scores below 600) hit a new low of 20% of U.S. adults who have FICO scores representing a decrease from 20.5% in October and a peak of 25.5% in 2010.

What’s behind the improvement in credit scores?  Falling unemployment is one reason.  Ignoring certain data sets is another.  A big reason not to be ignored is the passage of time.

Mortgage foreclosures stay on credit reports for up to seven years dating back to the missed payment that resulted in the foreclosure.  Personal bankruptcies can stay on credit reports for 7-10 years.

What does it mean for consumers?

Those who filed in 2007 for Chapter 7 (the most common type of bankruptcy in which certain debts are discharged and creditors can get paid back from sales of consumers’ assets) are now starting to see those events fall off their reports.

Those who filed for Chapter 13 (in which they enter a payment plan with creditors) reached a peak of nearly 435,000 in 2010.  Those black marks will start to roll off credit reports in 2017.

What does it mean for the economy?

Higher credit scores should lead to more available credit.  As home, auto and credit card lending expand so too will aggregate economic activity due to increased demand for goods and services.

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