American creditworthiness continues to improve. But credit scores don't tell the whole story of how consumers are financially.
A new report from Experian
EXPN + 1.15%
found that the average FICO in the U.S. reached an all-time high of 703 in 2019, up from 701 in the previous year and 14 points higher than in 2010. Overall, 59% of Americans have a FICO
at 700 or more, the highest percentage ever reached at that threshold.
A credit score of 700 or more is generally an indicator of good credit for most lenders, Experian says. "These borrowers may get a wider range of loan product offerings at better interest rates than those with scores below 700," said Matt Tatham, manager of content insights and data analyst at Experian Consumer Services, in the report. "A score of 800 or higher is usually considered excellent."
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The rise in credit scores largely reflects the positive changes that consumers have made. Over the past decade, default and late payment rates for most types of debt have been falling steadily, making a huge contribution to improving results. In addition, the average creditworthiness of millennials has improved by 25 points since 2012.
"These higher credit scores are mainly due to our decades of economic expansion," said Ted Rossman, industry analyst at CreditCards.com and Bankrate. "Consumers generally do a good job of keeping up with their bills."
Credit scores are not for consumers
Now for the bad news: Rising credit scores don't necessarily mean that Americans are financially better off. Punctual payments do not lead to lower debt levels. In fact, debt balances for most types of loans have increased on average over the past year, Experian said. A separate study by Bankrate found that two thirds of people with credit card debt owe at least as much as in the past decade.
"Loan repayment and credit card blocking may be in your interest, but can often be detrimental to your score."
Juggling all of these payments can result in Americans having cash. But juggling can improve people's creditworthiness. Different forms of credit can have a positive impact on a person's creditworthiness and give them a boost, even if it means that the total amount of debt they owe increases.
"Consumers who make all these payments for these different types of debt could increase their score," said Sara Rathner, credit card specialist at NerdWallet.
Credit scores are not intended for consumers, said Peter Hoglund, senior vice president of Wealth Enhancement Group's national wealth management company in New Jersey. "They are designed to show whether the person would be a good customer of the potential lender," he said.
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In addition, credit rating models can reward some behaviors that may not be in your best financial interest otherwise. "Repaying credit and closing credit cards may be in your best interest, but it can often be a mistake for your score," said Hoglund.
Americans can use their higher credit scores to their advantage
A higher credit rating alone may not mean that a person is in better financial condition, but it can show a way to get there.
A recent study by Lendingtree
found that an average American switching from a "fair" credit score (between 580 and 669) to a "very good" score (between 740 and 799) could save up to $ 41,416 in interest who are paid the full term of their mortgage loan. It also produces interest savings on credit cards, personal loans, auto loans, and student loans.
"The advantage is the higher creditworthiness, which can offer many different options in the future," said Rathner.
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For those who have increased their credit scores, now is a good time to re-evaluate and even refinance or consolidate debt. A better score improves access to lower-interest loans and other credit cards that offer both better premiums and lower interest rates.
"Get ahead of your guilt now," said Rossman. "Take advantage of the good times and realize that they are unlikely to last forever."
When deciding to refinance, take into account the net savings, including lending fees, that are payable to the lender. Of course, for those seeking debt consolidation – whether through a personal loan, credit card transfer, or otherwise – it is important to use the savings for purposes other than spending.