It’s no shock that during the devastating economic downturn, a lot of people went from good credit to bad, as job losses and foreclosures took their toll. But here’s a surprise: According to FICO data, the number of people with excellent credit didn’t fall during the recession — it grew.
“Many people seem to think that everyone’s FICO score must be down these days. However scores have moved in both directions,” says Rachel Bell, senior director of global scoring solutions for FICO.
FICO recently reviewed U.S. consumers’ credit scores from 2005 through 2011. That date range allowed FICO to follow scores before, during and after the economic recession that began in late 2007 and took a severe downward turn in September 2008, before ending in the summer of 2009. What FICO found was that the recession pushed more consumers from the middle of its scoring range (300 to 850) out to the margins: Consumers who already had bad credit saw their FICO scores worsen amid the start of the recession, while those with good credit saw their FICO scores improve during the downturn’s early days.
That shift didn’t surprise FICO, Bell says. “We have been keeping watch on the nation’s FICO scores since 1989, through economic upswings as well as downturns,” she says. Among their findings, Bell says FICO score distribution — the number of borrowers with bad, fair, good or excellent credit — is “remarkably stable” across the country during ordinary times, likely because of the size and diversity of U.S. consumers as a group.
Recessions have a way of shaking things up, though. “It takes a momentous change to shift the national score distribution up or down by just a couple of points. The shifts that we reported earlier this month certainly reflect economic turbulence on a major scale,” she says.
Typically, FICO says that about 13 million consumers have awful credit, with FICO scores between 300 and 499. “In the first year of the recession, loan defaults and bankruptcies pushed the FICO scores of roughly 1 million more people to under 500,” Bell says. FICO has previously said that a 30-day late payment can cause a score to drop by as much as 45 points, while a bankruptcy can cause a score to drop by as much as 240 points.
However, consumer advocates say it wasn’t just the actions of consumers that lowered credit scores. “Right after the first signs of fallout in 2008, and pre-CARD Act, many creditors reduced lines of credit and hiked the score necessary to qualify for credit,” says Linda Sherry, director of national priorities for nonprofit advocacy group Consumer Action. She’s referring to the preemptive strikes card issuers took against consumers in anticipation of reforms in the Credit CARD Act of 2009. “These actions may have had some impact across the board.” That’s because reductions in available credit can have a negative impact on credit scores.
What about those high scorers? At the top end of its range, about 34 million consumers typically have FICO scores between 800 and 850. When the recession hit, consumers just shy of the 800 mark, with good but not great credit, responded cautiously. “In the first year of the recession, roughly 3 million people who already had good scores were able to tighten their use of credit, postpone big purchases and pay down their outstanding credit card balances, actions that combined to move their FICO scores to over 800,” Bell says. “That’s a story that hasn’t appeared very often in the news media.”
After 2008, FICO says that credit scores snapped back toward the middle of its range. Since then, 2.8 million additional consumers now have scores between 550 and 649, with fewer scoring at the top or bottom of FICO’s scoring range. “These shifts likely reflect the increasing number of people going through mortgage foreclosure, credit card defaults and other serious credit problems,” FICO’s Bell says. Those negative events can take time to erase. FICO “score recovery from negative events such as mortgage foreclosure typically takes from three to seven years for consumers who meet their credit obligations following such events,” FICO says on its blog.
But scores do recover. Since building a longer credit history is good for FICO scores, as accounts with positive history age, consumers’ scores should improve naturally. “Likewise, people who decide to get back on track by paying their bills on time following a catastrophic credit event such as a foreclosure or bankruptcy can recover surprisingly quickly within just a few years,” Sherry says.
See related: FICO reveals how common credit mistakes affect scores, A guide to the Credit CARD Act of 2009