How does inflation have an effect on credit score scores? FICO’s CEO weighs in

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From a credit standpoint, Americans have done exceptionally well during the pandemic. Since the pandemic began, the average Fair Isaac Corp (FICO) credit of Americans has increased eight points to 716.

The spike came as the government spent trillions of dollars on stimulus programs and relief efforts, and consumers cut their spending in part due to coronavirus restrictions and shop closings.

This has enabled many people to pay off existing debts and temporarily stop borrowing to finance their expenses.

But many of these stimulus measures – including improved unemployment benefits, the eviction moratorium and the student loan repayment hiatus – have ended or will soon.

In addition, the inflation level is at a 31-year high. Americans pay more for almost everything from gasoline to groceries – which are up 6.1% and 1.0%, respectively, last month compared to September, and nearly 50% and 5.4%, respectively, since last October have risen.

This could undo some of the improvements Americans made to their creditworthiness during the pandemic, for example if consumers are faced with the choice between paying for everyday expenses like groceries or paying off debts on time.

To learn more about how inflation could affect Americans’ credit scores, MarketWatch spoke to FICO’s FICO, +1.35% CEO William Lansing.

Market observation: Were you surprised that credit scores hit an all-time high during the pandemic, when unemployment was so high and much of the economy was in lockdown?

William Lansing: It was a bit of a puzzle and I think everyone was surprised. I was a little less surprised than some others. I didn’t think we’d have a V-shaped recovery, but I didn’t think it would be a lengthy recovery as predicted.

MW: How do you think rising inflation will affect Americans’ creditworthiness? Could it depress the national credit score if inflation continues to rise?

WL: Inflation alone, at least at this level, will not have a significant impact on overall national creditworthiness.

But if prices exceed income and people end up running into more debt – that would obviously affect their FICO credit score. There is also a seasonal component – consumers typically take on more debt around the holidays around the fourth quarter. So we could see a modest downward trend.

MW: What about inflation coupled with the fact that many of the incentive measures that were in place when creditworthiness hit a record high are no longer in place?

WL: This can of course have an impact.

The input into the score is outstanding debt. Anything that causes consumers to take on more debt than they currently have will affect the score down.

“Anything that causes consumers to take on more debt than they currently have will affect the score down”

– FICO CEO William Lansing

MW: Rising inflation also supports the Federal Reserve’s case to raise interest rates from current levels near zero. This of course makes it more expensive for private individuals to borrow money. How do you see this affecting creditworthiness, if any?

WL: These things happen over long periods of time. It is hoped that consumers will be sufficiently responsible – that they will choose [the amount of debt they take on] back as they see their interest expense rise. But in theory it could well be [lower credit scores].

MW: The general rise in credit scores during the pandemic was primarily driven by consumers who had a credit score below 600 (generally, a FICO score between 670 and 739 is considered good, while anything below 580 is considered bad).

“People who are financially under pressure and who end up taking on more debt are more likely to come under more pressure to score”

– FICO CEO William Lansing

Consumers who fell in the low-scoring category had an average credit score of 581 in April 2020. However, by April 2021, that score rose to an average of 601. Meanwhile, consumers in higher-scoring categories saw little to no change on average in the Credit-worthiness.

Do you think that the group with the lower valuations is more likely to be hit by rising inflation and therefore pushing down creditworthiness?

WL: That’s fair speculation. People who are financially under pressure and who end up taking on more debt are more likely to be under pressure.

MW: Instead of shopping by credit card, more and more Americans are choosing to pay for goods in installments via platforms such as Klarna, Affirm AFRM, -2.13% and Afterpay APT, -1.80%..
But when consumers make on-time installment payments, it doesn’t count towards their creditworthiness, unlike on-time credit card payments that would.

Do you think Americans could have better creditworthiness if they didn’t use BNPL as often?

WL: There’s no question that your score is largely determined by credit card payment information. So if you don’t have a score, using a credit card will help you get a score. If you have a score and you want to improve it, good behavior will help pay credit card bills on time [boost your credit score].

“There’s no question that your score is largely determined by credit card payment information”

– FICO CEO William Lansing

MW: Do you think the habits more Americans developed during the pandemic of paying off credit card debt and being a little more responsible about spending can continue?

WL: I don’t know if it’s pandemic related or just part of a general trend, but what we’re seeing is an increase in financial literacy. And we support that very much.

The whole thing about a credit score is that it shouldn’t be a “fist”. It’s really just a measure of how risky you are. If you can behave more responsibly, you will get better scores, better interest rates and access to more debt.

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