How FICO Score Changes Are Creating New Credit Opportunities for Americans

A Double Record for Credit Scores in America

This spring marks a historic moment for American credit scores: the average credit score for adults across the country has reached an all-time high, while the share of U.S. adults with the riskiest scores has hit a record low.

Rising Credit Scores and Increased Creditworthiness

More Americans are improving their creditworthiness, according to reports from Fair Isaac Corp., the creator of the FICO credit score. The FICO score, which ranges from 300 to 850, is a crucial number that lenders use to determine credit limits and borrowing options for homes and vehicles. These records reflect progressive changes in the credit score calculation process, making it easier for millions of Americans to obtain loans.

Key Changes in Credit Score Calculations

Several recent modifications in credit reporting have contributed to these improved scores:

• In Summer 2014, FICO scores stopped factoring in records of unpaid bills once they were paid or settled by a collection agency.
• In March of this year, the Wall Street Journal reported that many tax liens and civil judgments would soon be removed from credit reports, eliminating negative financial data that previously hurt consumers’ credit scores.

These changes have already had significant effects. In April, the average credit score in the U.S. reached 700, the highest recorded since 2005 when tracking began. Additionally, the number of Americans with scores below 600 has dropped to a new low—just 20% of adults, approximately 40 million consumers.

The Impact of Foreclosures and Bankruptcies Fading Away

Another major factor in the improvement of credit scores is the expiration of foreclosure and bankruptcy records from the 2007–2010 financial crisis. As the 7–10 year reporting window closes, many consumers are seeing negative marks disappear from their credit reports. A recent Barclays report estimates that over 6 million Americans will have personal bankruptcies removed from their records in the next five years. The Wall Street Journal highlights several key trends:

• Mortgage foreclosures remain on credit reports for up to seven years, dating back to the missed payment that triggered the foreclosure.
• Foreclosure starts peaked in 2009 at 2.1 million cases, with nearly 1.8 million cases in 2010. The numbers remained above one million for the following two years.
• Chapter 7 bankruptcies, in which debts are discharged and creditors are repaid through asset liquidation, can stay on reports for 7–10 years. In 2007, 500,000 Chapter 7 bankruptcies were filed, a number that surged to 1.1 million in 2010.
• Chapter 13 bankruptcies, which involve a structured repayment plan, usually stay on credit reports for at least seven years. These filings peaked at 435,000 in 2010 and are now beginning to disappear.

What This Means for Consumers

With improved credit scores, many Americans will now qualify for credit cards they were previously denied. Additionally, those who were forced to rent due to poor credit may now be eligible for home mortgages. While these changes present new financial opportunities for many, only time will tell whether lessons from the credit crises of the past decade have been fully learned.