Balancing Rocks

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Even all these years later, we’re still jumpy about a recession.

Technically, according to the Bureau of Labor Statistics, the Great Recession lasted from December 2007 to June 2009, though it’s fair to say that plenty of people felt like it lasted a lot longer than that. In any case, when the credit scoring company, FICO, released its new data earlier this year, their data showed that average credit scores are now up to 699. This caused some rumblings among industry watchers.

It isn’t that 699 is bad. In fact, 699  is one point away from “good credit” – and it’s nine points higher than the average credit score right before the recession.

Credit Score Ranges and Quality

Credit Score RangesCredit QualityEffect on Ability to Obtain Loans
300-559Very BadExtremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.
560-649BadMay be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.
650-699Average/FairEligible for many traditional loans, but the interest rates and terms may not be the best.
700-749GoodValuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.
750-850ExcellentQualify easily for most loans and lines of credit with low interest rates and favorable terms.

By all means, seeing average credit scores going up is a great thing. So why the ripple of worry among anyone paying attention? While credit scores are going up, so is debt. In fact, the total U.S. consumer revolving debt, which includes credit card debt, is approaching the same levels as those during the Great Recession. And according to that FICO data, delinquency rates are a little higher.

So should we be worried?

I vote, “No, not very,” mostly based on two conversations with debt experts and authors. But, like any topic, a lot of it depends on how you see the world.

The Good News

If you’re an optimist, here’s why you shouldn’t be concerned. First of all, it is possible to have rising FICO scores while there’s rising debt, says Leslie Tayne, a financial attorney with the Tayne Law Group, P.C., in Melville, New York, and the author of Life & Debt.

“For starters, your revolving debt is not the sole factor that determines your score. Your score is made up of five categories – 35 percent payment history, 30 percent amounts owed, 15 percent length of credit history, 10 percent new credit and 10 percent credit mix,” Tayne says.

FICO Credit Score Factors and Their Percentages

FICO credit score factorsPercentage weight on credit score:What it means:
Payment history35%Your track record when it comes to making (at least) the minimum payment by the due date.
Amounts owed30%How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.
Length of credit history15%The average age of your active credit lines. Longer histories tend to show responsibility with credit.
Credit mix10%The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)
New credit10%The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.

So, yes, there’s more debt, but it’s also clear that the country as a whole is being smarter about how they manage their debt and money.

Andrew Smith agrees. Smith is a former chief financial officer for a registered investment fund, among other things, and is also the author of the new book, Financial Literacy for Millennials.

Despite some data showing people becoming delinquent on their debt payments, overall, the numbers have been looking good, according to Smith.

“Serious consumer debt delinquencies, where debt is 90 days past due, have fallen 230 basis points since 2013,” Smith says.

He adds that bankruptcy and collection activity are way down. And, while total revolving debt and average credit card balances have been increasing steadily for years, “they are both still below the levels preceding the financial crisis.”

And the future looks bright for the youngest generation, according to Smith.

“Millennials as a group have been slow to use debt products, reflecting their characteristic risk aversion, compared to other generations at the same age, and life experience following the financial crisis,” he says.

That may help them as the years go on. As Smith explains, “Similarly, consumers living through the Great Depression had strong habits of thrift their entire lives.”

So, again, if you saw the recent FICO report and fear that this was the beginning of a new recession, relax. Go worry about something else, like climate change or whether your favorite TV show is likely to be canceled (I lie awake at nights hoping NBC will keep The Good Place on its schedule). But if you really do like to worry and want something to be nervous about in this FICO report, well, okay… you asked for it…

The Not So Good News

One reason that Millennials aren’t accruing a ton of debt is due to their young age. In other words, give them a little more time.

“Millennials, constituting our largest demographic group today of roughly 85 million consumers and 55 million workers, are entering the prime of their lives and are finally starting to borrow and spend,” Smith says.

And one reason the average credit score is going up, and credit scores are looking good in general, Smith says, is that “some low-credit score consumers have simply dropped out of the credit scene.”

In other words, some borrowers have given up on borrowing.

There’s more. But even with that downer, that some consumers have just given up trying to right their credit ship and have stopped borrowing, there’s a silver lining, Smith says. The silver lining is that this has left the remaining borrowing pool stronger.

“Defaults, bankruptcies and negative credit information incurred during the financial crisis in 2008-09 are starting to fall off credit reports (per federal law limiting negative data to seven years); and after seven years of economic recovery – albeit a slow one – our balance sheets are becoming healthy again,” Smith says.

Tayne agrees. “I definitely think since the Great Recession people are a little more cautious when dealing with their monetary situations. Consumers might have gone from splurging at the mall to taking an extra look at their budget,” she says.

Not convinced? Still jumpy? Watch The Good Place. Seriously. Funniest and most upbeat show you’ll find.

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