Credit scores unchanged since recession began

Conventional wisdom states that during the recent national recession, the average consumer's credit rating took a significant tumble, but it seems that this may not have been the case.

It was long believed that the average consumer credit score nationwide would have taken a noticeable dive during and immediately following the recent recession, but new data shows that despite layoffs, huge rises in delinquency and default, and other financial issues suffered by millions of Americans, that simply wasn't the case, according to a report from Smart Money. Data from the credit scoring firm FICO shows that in April 2012, the average person's credit score stood at 690, and was more or less in line with levels seen since the beginning of the recession.

"Something stunning isn't showing up in the data," Anthony Sanders, a professor of finance at George Mason University, told the news magazine.

Despite huge spikes in foreclosure and credit card defaults between 2007 and 2010, the average credit score only dipped very slightly during that time, the report said. At the start of the recession, consumers had an average credit rating of 689, and that fell to only as low as 686 in 2009 before slowly rising again. For its part, FICO says that, because there are roughly 200 million Americans with credit ratings in their names, it would take far larger numbers of defaults on all loan types to move the needle more appreciably.

However, experts don't see it that way, the report said. About 9 million homes have been foreclosed upon since the beginning of 2007 and more than 6 million people have filed for bankruptcy, and both actions will take huge chunks out of borrowers' scores.

What do these statistics mean?

If millions of Americans had financial difficulties so severe that they lost their homes or were forced to file for personal bankruptcy during and after the recession, then why haven't nationwide credit scores fallen more appreciably? Some experts say that it could be the result of credit scores no longer being accurate predictors of consumers' creditworthiness, the report said. Nonetheless, they are the foundation of the entire lending system and therefore still carry significant weight even for those whose scores are right around the nationwide average seen in the last several years.

Further, experts note that it is far more difficult for borrowers to improve their credit scores than it is for missteps to take massive bites out of them, the report said. For example, payment history accounts for 35 percent of a borrower's total rating and can take a huge hit even if one bill is late by a single day. Meanwhile, months of steady repayments being made on time and in full will not have the opposite effect because borrowers are expected to make all deadlines. In addition, taking steps to reduce outstanding debt more quickly might also not have as dramatic an effect on a borrower's credit rating because the amount owed at any one time only accounts for 30 percent of a score.

Despite consumers' credit scores remaining largely unchanged throughout the economic downturn, lenders significantly boosted the qualifications they require to extend credit to borrowers, the report said. These days, only those consumers whose credit ratings are above levels as high as 740 will be able to obtain the most affordable rates on their mortgages. That's up from just 680 observed prior to the beginning of the recession.

However, some in the lending industry have since noted that perhaps their efforts to extend credit to many Americans in spite of their subprime ratings was not as wise as they may have thought it to be at the time. The tightening credit qualifications seen during and following the recession were likely a reaction both to the increased instances of delinquency and default, as well as a desire to drastically improve the overall credit quality of their portfolios. Nonetheless, as the effects of the recent recession continue to fade, many credit card issuers are once again slowly extending credit to those who carry subprime credit ratings.

And while that trend hasn't made its way to the mortgage market, there are some consumer advocates calling for it to do so. Many now believe mortgage lending has remained entirely too restrictive even since the end of the recession and is actually hindering housing recovery, as a large number of creditworthy borrowers may have the financial ability to handle such a transaction, but not the credit rating.

If you are looking to improve your credit score, borrowing responsibly is one great way to do it. Keeping your credit card debts to about 30 percent of the total overall limits on all accounts and making all payments on time over the course of several months will help to ensure your rating is as strong as possible.

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