Average Credit Score in America higher then you think.

[blondy250]

http://www.fool.com/credit-cards/2016/11/28/this-is-the-average-credit-score-in-america-and-it.aspx

[newhis]

My guess is that most didn't know their score before CK (Vantage) or several credit card statements (most FICO).

I think the average it's going up because of this.

Once you know your score, you will try to bring it higher.

[Anonymous]

The author of the piece writes:

"Preferably, we'd like to see as many people as possible at 720 or higher, which is where the best deals are to be had from lenders."

I am not sure who he thinks WE is.  As far as I can tell no specific individual should like it if almost everyone would raise his credit score.  A person with bad credit suffers, since he looks even worse to lenders (by comparison) then he did before.  But the person with really good credit would suffer too, since he would look much less exceptional than he did before. 

The author seems to be under the impression that "720" is a magic number handed down by God, whereas its just an arbitrary line in the sand based on the fact that for a long time a simple majority of people were scoring less than that and that some people were scoring much lower.

The much more accurate description of self-interested borrowers is:

Preferably, any person would like to see as many people as possible scoring substantially under 720, so that he will stand out and have a shot at getting the best deal from a lender.

I think Newhis is right, that more and more people are learning how to game the credit scoring system (via widespread proliferation of free tools, free scores, and free advice) which is not good for people currently in the low 700s, who will be looking more and more mediocre over time.. One more reason for people to have a credit scoring plan that includes increasing their scores and the general quality of their profile beyond the current "720" mark.  I think that any particular person, if he's smart, should aim to be in the 800 club eventually -- not immediately but he should have a plan for getting there eventually.

The best single thing that anyone can do to ensure he is standing out as an impressive and very low risk borrower (in the years to come) is to always pay his cards in full.  Most Americans do not do that (amazingly) and future scoring models will be able to detect if you have a history of having always paid in full, which will mark you as reliable and very low risk.  Creating that history in one's trended data cannot be done overnight, so any particular person should begin creating that history as soon as he comfortably can.

[Revelate]

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@Anonymous wrote:

The author of the piece writes:

"Preferably, we'd like to see as many people as possible at 720 or higher, which is where the best deals are to be had from lenders."

I am not sure who he thinks WE is.  As far as I can tell no specific individual should like it if almost everyone would raise his credit score.  A person with bad credit suffers, since he looks even worse to lenders (by comparison) then he did before.  But the person with really good credit would suffer too, since he would look much less exceptional than he did before. 

The author seems to be under the impression that "720" is a magic number handed down by God, whereas its just an arbitrary line in the sand based on the fact that for a long time a simple majority of people were scoring less than that and that some people were scoring much lower.

The much more accurate description of self-interested borrowers is:

Preferably, any person would like to see as many people as possible scoring substantially under 720, so that he will stand out and have a shot at getting the best deal from a lender.

I think Newhis is right, that more and more people are learning how to game the credit scoring system (via widespread proliferation of free tools, free scores, and free advice) which is not good for people currently in the low 700s, who will be looking more and more mediocre over time.. One more reason for people to have a credit scoring plan that includes increasing their scores and the general quality of their profile beyond the current "720" mark.  I think that any particular person, if he's smart, should aim to be in the 800 club eventually -- not immediately but he should have a plan for getting there eventually.

The best single thing that anyone can do to ensure he is standing out as an impressive and very low risk borrower (in the years to come) is to always pay his cards in full.  Most Americans do not do that (amazingly) and future scoring models will be able to detect if you have a history of having always paid in full, which will mark you as reliable and very low risk.  Creating that history in one's trended data cannot be done overnight, so any particular person should begin creating that history as soon as he comfortably can.

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Motley Fool is an investment / financial service (various products from stock picking to a somewhat traditional wealth management fund)... always have to consider the source of the information.  Their articles are designed to generate traffic so they're going to be a little off journalistic ideals.

The ValuePenguin site they based the data on is has some interesting tidbits in it, but the glaring error in all this is did they even use the same credit score when collecting the data?  Almost assuredly with some of it they did not, unfortunately.

[iced]

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@Anonymous wrote:

The author of the piece writes:

"Preferably, we'd like to see as many people as possible at 720 or higher, which is where the best deals are to be had from lenders."

I am not sure who he thinks WE is.  As far as I can tell no specific individual should like it if almost everyone would raise his credit score.  A person with bad credit suffers, since he looks even worse to lenders (by comparison) then he did before.  But the person with really good credit would suffer too, since he would look much less exceptional than he did before. 

The author seems to be under the impression that "720" is a magic number handed down by God, whereas its just an arbitrary line in the sand based on the fact that for a long time a simple majority of people were scoring less than that and that some people were scoring much lower.

The much more accurate description of self-interested borrowers is:

Preferably, any person would like to see as many people as possible scoring substantially under 720, so that he will stand out and have a shot at getting the best deal from a lender.

I think Newhis is right, that more and more people are learning how to game the credit scoring system (via widespread proliferation of free tools, free scores, and free advice) which is not good for people currently in the low 700s, who will be looking more and more mediocre over time.. One more reason for people to have a credit scoring plan that includes increasing their scores and the general quality of their profile beyond the current "720" mark.  I think that any particular person, if he's smart, should aim to be in the 800 club eventually -- not immediately but he should have a plan for getting there eventually.

The best single thing that anyone can do to ensure he is standing out as an impressive and very low risk borrower (in the years to come) is to always pay his cards in full.  Most Americans do not do that (amazingly) and future scoring models will be able to detect if you have a history of having always paid in full, which will mark you as reliable and very low risk.  Creating that history in one's trended data cannot be done overnight, so any particular person should begin creating that history as soon as he comfortably can.

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The logic that people with good scores suffer when people with bad scores improve is flawed. Credit scores are not a competition and they are not a zero-sum game where there must be winners and losers. They're a tool where banks can determine the creditworthiness of an individual.

Lenders charge more interest to lower scores to offset their risk. Yes, when a high risk borrower pays off a loan in good standing, the lender makes a little more profit off the higher interest, but at the end of the day *most* lenders aren't counting on that. There are predatory lenders out there who do want low score people, and they are called predatory for a reason. All reputable lenders would be content if everyone they loaned money to had excellent credit and paid all their debts in a timely manner.

If I have an 800 score and get a 4% mortgage, great. If everyone else moves up to 800, guess what? Doesn't affect me. I still get that 4% mortgage.

I for one would be thrilled if the everyone collectively got their crap together and lived responsibly and within their means. When I see people buying a new TV every few years or cars that cost 50% of their annual salary or quagmired with maxed out cards or living paycheck to paycheck, I don't feel good about it. It makes me angry - I want to shake those people until the common sense loosens up and starts flowing again! That's a big reason I'm on this forum to begin with. If my ranting about saving and reasonable living is Jiminy Cricket enough to get  even one person to clean up and be more financially responsible, it was worth it.

[Anonymous]

Hello Iced.  It's an interesting question in the area of installment accounts and one I am not sure either of us can know the answer.  It's possible that high interest borrowers do not in any way subsidize the cost of their low risk counterparts -- that their high risk loans are priced precisely to cover only the extra expense associated with delinquency and default.  You may well be right there and, come the Parousia, we'd all be getting the same very low interest loans.  (In other word, instead of loans at 3, 5, and 7% we'd all have loans at 3% -- rather than all of us having loans at 3.7% say.)  So that's a good point and one I need to rethink.

But I know in the case of CC debt that is not the case.  If everyone began adopting responsible financial habits, that would necessarily mean virtually no one would carry CC debt.  If that happened, CC issuers would no longer benefit from charging people who now carry large balances high interest rates.  They would have to find other methods of dealing with the cost they incur from offering credit cards: swipe fees would have to be increased a lot, rewards packages dropped, annual fees would become much more common, etc.  Right now there's no question my cards and reward packages are paid for by people with bad financial habits.

And when you say that credit scores are not a competition, that is certainly not true.  They are not entirely a competition but people are indeed placed by FICO (also by Vantage, etc.) into a fairly small number of groups ("scorecards") and then within those groups are graded in part on a curve -- in competition with one another.  Thus the phenomenom discussed so often here on the forum of "rebucketing." 

You've certainly raised good points, however, and made me think.  You are likely right that on the whole the benefits to a person like me if the whole world got its financial act together would outstrip any benefit I currently get from being exceptional (e.g. great CC rewards and bonsues and no costs).  Our economy would be in better shape, etc.

But since it is most unlikely that everyone will suddenly become financially resonsible, any more than people will suddenly all start loving their neighbor with crime vanishing and Wall street choosing not exploit anyone and the national debt vanishing (etc.), we'll likely remain in this fallen world where people are Good and Bad and are scored and judged (at least in part) relative to one another.  And in that world I think it makes sense for any particular individual to strive to distinguish himself above his peers.  In the world of financial and credit behavior, that includes not only trying to have good credit behavior (in some absolute sense) but to have better credit behavior -- i.e. better than the other guy.

Fortunately one of the easiest ways to do that now is to pay all one's cards in full every month.  It is an arresting fact how many people  do not do that -- how many people carry balances, often quite large ones, every month.  We are moving into a world of credit scoring where models will begin to detect whether one engages in this very simple behavior (called being a transactor) and people who do will distinguish themselves sharply from their fellow consumers (the revolvers).

[iced]

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@Anonymous wrote:

Hello Iced.  It's an interesting question in the area of installment accounts and one I am not sure either of us can know the answer.  It's possible that high interest borrowers do not in any way subsidize the cost of their low risk counterparts -- that their high risk loans are priced precisely to cover only the extra expense associated with delinquency and default.  You may well be right there and, come the Parousia, we'd all be getting the same very low interest loans.  (In other word, instead of loans at 3, 5, and 7% we'd all have loans at 3% -- rather than all of us having loans at 3.7% say.)  So that's a good point and one I need to rethink.

But I know in the case of CC debt that is not the case.  If everyone began adopting responsible financial habits, that would necessarily mean virtually no one would carry CC debt.  If that happened, CC issuers would no longer benefit from charging people who now carry large balances high interest rates.  They would have to find other methods of dealing with the cost they incur from offering credit cards: swipe fees would have to be increased a lot, rewards packages dropped, annual fees would become much more common, etc.  Right now there's no question my cards and reward packages are paid for by people with bad financial habits.

And when you say that credit scores are not a competition, that is certainly not true.  They are not entirely a competition but people are indeed placed by FICO (also by Vantage, etc.) into a fairly small number of groups ("scorecards") and then within those groups are graded in part on a curve -- in competition with one another.  Thus the phenomenom discussed so often here on the forum of "rebucketing." 

You've certainly raised good points, however, and made me think.  You are likely right that on the whole the benefits to a person like me if the whole world got its financial act together would outstrip any benefit I currently get from being exceptional (e.g. great CC rewards and bonsues and no costs).  Our economy would be in better shape, etc.

But since it is most unlikely that everyone will suddenly become financially resonsible, any more than people will suddenly all start loving their neighbor with crime vanishing and Wall street choosing not exploit anyone and the national debt vanishing (etc.), we'll likely remain in this fallen world where people are Good and Bad and are scored and judged (at least in part) relative to one another.  And in that world I think it makes sense for any particular individual to strive to distinguish himself above his peers.  In the world of financial and credit behavior, that includes not only trying to have good credit behavior (in some absolute sense) but to have better credit behavior -- i.e. better than the other guy.

Fortunately one of the easiest ways to do that now is to pay all one's cards in full every month.  It is an arresting fact how many people  do not do that -- how many people carry balances, often quite large ones, every month.  We are moving into a world of credit scoring where models will begin to detect whether one engages in this very simple behavior (called being a transactor) and people who do will distinguish themselves sharply from their fellow consumers (the revolvers).

---

I understand your points regarding CC's relying on interest to be profitable, and some certainly do, but I think you also underestimate the value of swipe and licensing fees in the equation. A couple items that gnaw at me when I think that interest is critical:

1. How does American Express stay profitable when their flagship cards do not charge interest? Their core business model for the "NPSL" cards is that they don't want you carrying a balance.

2. If banks need interest, why do prime cards all have a grace period before interest accrues? There's technically nothing stopping Chase or Citi from accruing interest on your charges the day after you make them, but they won't charge you a dime if you pay your statement balance every month. I've looked into this a bit, thinking maybe there was a law about it, but found nothing that keeps a bank from legally doing this (and in fact, I think Credit One *does* do this to its unfortunate users).

3. Why do people who are least likely to accrue any interest charges (by paying in full monthly) tend to be seen as the best customers by the banks?

I still stand by statement that the scores themselves aren't a competition. People have made it a competition in their minds, and scoring models like FICO and Vantage play into the human instinct of competition. It actually encourages us to do better, because we feel like we're winning something. You know, gold stars, TripAdvisor points, etc.

We're constantly bombarded by marketing and messaging that tries to pit us against our fellow humans, because it is indeed a motivator, but make no mistake - the banks, including credit card lenders, don't care. They have computer systrems and risk models based on lots of math and research, and if those systems have figured out that a person with a score of 750 is X% likely to default versus someone with a 680 who may default with a probability of Y%, all they care about is if you're in bucket 1 or bucket 2. They do not care if 20% or 80% of the people are in bucket 1.

[Anonymous]

Hey, buddy, I like what you are saying and hope I have made that clear.

But as touches the issue of competition, you may want to soften your stance a bit (as you see that I have from listening to you).  It's simply incontrovertible that one's score is based partly through scoring you against other consumers.  This is what I was talking about when I referred to the way that FICO and Vantage grade you on a curve against the people in your scorecard.  This isn't lore -- it's well established that they do this.  So in part your score necessarily involves competing with other consumers.

I like your three questions.  I give you my take on them below in blue.

1. How does American Express stay profitable when their flagship cards do not charge interest? Their core business model for the "NPSL" cards is that they don't want you carrying a balance.

Amex's profitablity goes back and forth.  In general the trajectory over the last few decades has been downward, as they have lost their sole domiance in the prestige/bragging niche and as merchants have begun valuing the far lower swipe fees of Visa, Mastercard, and Discover.

The answer for your question about their charge cards is that they charge you an annual fee.  I have not found a card yet that I want to pay an annual fee for, with the exception of something like the Chase Sapphire Reserved and similar monster bonus offers, but even still my approach is to downgrade them after the first year or cancel them outright.

2. If banks need interest, why do prime cards all have a grace period before interest accrues? There's technically nothing stopping Chase or Citi from accruing interest on your charges the day after you make them, but they won't charge you a dime if you pay your statement balance every month. I've looked into this a bit, thinking maybe there was a law about it, but found nothing that keeps a bank from legally doing this (and in fact, I think Credit One *does* do this to its unfortunate users).

I think the force is pretty simple.  It's not a legal force but just the law of competition in a capitalist economy.  If an issuer began charging you intererst the day after a purchase, most people would switch to a different product.  I certainly would.

3. Why do people who are least likely to accrue any interest charges (by paying in full monthly) tend to be seen as the best customers by the banks?

I am not sure they are considered the best.  Best would be people who are never late and who pay a lot of interest.  It is a challenge for card issuers to find those customers, but they are using techniques to do so, including especially the new technique of trended data.

A close second would be the PIF group you mention, who are less likely to default and who may generate income got the issuer via swipe fees.

[iced]

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@Anonymous wrote:

Hey, buddy, I like what you are saying and hope I have made that clear.

But as touches the issue of competition, you may want to soften your stance a bit (as you see that I have from listening to you).  It's simply incontrovertible that one's score is based partly through scoring you against other consumers.  This is what I was talking about when I referred to the way that FICO and Vantage grade you on a curve against the people in your scorecard.  This isn't lore -- it's well established that they do this.  So in part your score necessarily involves competing with other consumers.

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My apologies for being stubborn, and I think we both agree we're having a good conversation here.

The section in red above in particular I am struggling with - I can find no reference or documentation citing this, and in fact find evidence from FICO casting doubt on it (see below).

If you are stating that FICO looks at the actions of all of us as a whole and as individuals as part of how it assesses risk for the scores, sure. I can see using that as a valuable data point. However, if you are contending that my score directly hinges on somehow being better or worse than my peers, then I can't agree. To put it another way, if I have a score of 800 and simply maintain it by paying bills on time while the rest of the US works diligently to improve their scores, my score will not drop to 720 because there's too many people with an 800 score. Similarly, if 70% of the population attains an 800 score, the banks are not suddenly going to start declining people with 750s because their scores are too low nor are they going to hike my rates because my score is 830 and not 850.

As for my evidence, I present the following articles:

http://www.fico.com/en/blogs/risk-compliance/fico-score-distribution-remains-mixed/

http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/

Both articles suggest credit is trending upwards and have been for some time; the percentage of the population with low scores is shrinking while the population with the high scores is growing. If we were graded on a curve, these trends would have been balanced out with systemic score shifts to offset the trend and return distributions to adhere to the "curve."

On the other side of the equation, lending practices haven't shifted because of scoring (the recession in 2008-2009 did have an impact, though). FHA still approves at the same scores as last year or 5 years ago, and Chase is still handing out prime cards to people with scores in the mid to upper 600s.

[vanillabean]

"So how is America doing overall? Honestly, not too bad, although there's plenty of room for improvement.”
vs
"Credit card debt is increasing to levels seen before the 2008 financial crisis. Does it mean the U.S. economy is head for a downturn or simply show a justified optimism?”

What Highest Credit-Card Debt Since '08 Crisis Means for the U.S.

Also, if two elephants and a mouse walk on a bridge, the average weight differs from the mean weight. If I remember correctly from some years back, the average FICO score was 689, while the median FICO score was 723.

The FICO bell curve has changed over the years. The most popular score bracket, say 750-799, may increasing be moving away from the middle bracket.