What did the housing bust, financial crisis and ensuing wave of foreclosures and layoffs mean for the country's credit scores? Almost nothing, it seems.
The average FICO score -- the number most lenders use to gauge a potential borrower's credit-worthiness -- stood at 690 in April, according to data released last week. That is roughly in line with both last year's average score and the average in 2007, before the market meltdown and recession wiped out many Americans' wealth.
Credit experts offer two possible explanations for how the nation's most crucial measure of credit-worthiness can withstand all manner of financial cataclysms: Either something is off with FICO's formula or the numbers have lost much of their meaning.
"Something stunning isn't showing up in the data," says Anthony Sanders, a professor of finance at George Mason University, who studies credit scores.
FICO defends its calculations. There are roughly 200 million U.S. consumers with a FICO score, so in order for the average score to change more noticeably, a much larger number of consumers on one end need to be affected, says Anthony Sprauve, a spokesman for myFICO.com, the consumer division of FICO.
To better understand the FICO score, consumers should focus on the distribution of the score rather than the average. Over the past several years, even though the average has stayed roughly the same, more consumers have moved away from the middle in both directions, Mr. Sprauve says. There are "two opposing forces at play," Mr. Sprauve says.
But many credit pros say that data still don't add up. Since 2007, nearly nine million homes have gone into foreclosure and over six million people have filed for personal bankruptcy -- events that typically send FICO scores tumbling. Borrowers who previously had high FICO scores (above 750) may see their scores drop by more than 200 points in such events, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring site, and a former manager at FICO.
FICO scores are based solely on information in consumers' credit reports, which are maintained by the three largest credit bureaus -- Equifax (EFX),
Lawrence White, professor of economics at New York University's Leonard N. Stern School of Business, says the data raises a question about whether the FICO score still is a good predictor of a borrower's likelihood of repayment. Others say it raises doubts about the score's ability to detect a worsening credit environment. (VantageScore, another credit score, hasn't changed much either.)
Borrowers with average scores may have reason for concern, say experts, as lenders continue to raise the bar to qualify for their lowest rates. Mark Goldman, a senior loan officer with C2 Financial Corp., a San Diego-based mortgage brokerage firm, says the most affordable mortgages are given to borrowers who have at least a 740 FICO score, up from 680 in 2007.
And increasing a FICO score could be harder than lowering it, especially for consumers with a short or limited credit history. That is partly because negative behavior, like missed payments, counts toward 35% of a consumer's FICO score. In contrast, paying down debt helps boost a segment that accounts for 30% of the FICO score.