Statistics show that there has been a significant increase in the level of outstanding consumer credit card balances. For a significant segment of consumers, costs for groceries, utilities, cars and other consumer products have increased more than sources of income.

As a result, credit scores have been dropping, and real estate agents have been suggesting individuals looking to purchase a home try ways to increase their credit scores before they apply for a mortgage.

The credit-scoring firm FICO, has indicated that although the proportion of borrowers deemed “risky” has fallen, the segment of borrowers categorized as “nonprime” has grown dramatically. This has resulted in an increase in defaults associated with credit card payments and car payments in 2024.

In October 2023, according to FICO, for the first time in a decade, the average FICO score decreased by one point. In April 2024, nonprime borrowers spent 13% more than their credit card lines than when COVID-19 was raging; they also fell behind on credit card payments by 28%.

Most economists don’t believe that these changes are significant enough to slow down consumer spending very much, or to cause instability in the financial system. Total delinquencies are relatively low by historical standards, but it will have a negative effect on nonprime consumers, and it will impact their ability to purchase homes. In addition to higher real estate prices and higher interest rates, insurance costs related to real estate are also increasing rapidly, especially in areas of the country facing climate-related damage.

Approximately 17 million individuals with scores below 700 in April 2020 had scores that were 50 points higher a year later. But almost 40% of that group couldn’t maintain those gains as of April 2024. Even individuals who have been able to maintain those gains by continuing to make payments are facing not only higher housing prices but also higher interest rates. So its not surprising why so many voters in the 2024 election were nor optimistic about the economy.

According to representatives of the Consumer Financial Protection Bureau, individuals who initiated credit cards in 2021, 2022 and 2023 fell behind on bill payments faster than they did on accounts they originated in each of the previous five years. As a result, many banks protected their profitability by either reducing lending activities or expanding the ways they measure risk.

FICO tracks average FICO scores historically and compares the change in the average FICO score with the delinquency rates of auto loans and credit card scores. The data show that there is a significant learning curve. Initially, as the average FICO score was falling, the delinquency rate at the banks increased. But the banks have learned that they can adapt to falling FICO scores. They were able to reduce the volume of loans they initiate, and they found ways to be more selective in identifying borrowers more likely to make regular payments. If you look at the charts maintained by FICO, you will see that despite a fall in the average FICO score, the banking industry has been able to decrease the delinquency rate for the last three years for both credit card loans and auto loans.

Many small business owners have been able to adapt as well, when their bank can show flexibility. When bankers take the initiative and work closely with their borrowers, the results can be beneficial to both the bank and the borrowing customer. In this way, small business owners can keep operating and repay the loan in a timely manner. The bank benefits because it has a borrower who can repay the loan, and the bank does not have to write off the loan.

Bottom line: Decreases in FICO scores can make it very difficult for individuals to borrow money at reasonable rates and repay loans. To the extent that financial institutions can work with their customers with flexibility and creativity, both parties can benefit. President Biden recently indicated that individuals who were eligible for stimulus checks because of COVID-19 but did not apply for them will now receive checks. This should help many poor families and lenders that are owed money.