Credit scores are ‘imperfect by nature. According to data from The Federal Reserve, credit card debt for American consumers reach an all-time high of over $1 trillion dollars. Despite this staggering figure, a report from FICO shows the national average credit score increased to 718, making many wonder how this is possible? LendingTree Chief Credit Analyst Matt Schulz joins to break down this phenomenon, what it means for consumers, and give tips on how to avoid mounting massive credit card debt.
On why credit scores are a “lagging indicator” Schultz says: “For one thing, it doesn’t necessarily show where people stand with student loan repayments and how able they are to make those, and even when student loan payments crank up in full, those defaults and delinquencies won’t be reported for another year… and then another big thing that’s missing from these FICO scores, and all credit scores, is ‘buy now, pay later’ loans. We know that those are huge phenomenon, there’s a lot of money in those.”
Rachelle Akuffo: It is hard to decipher because we keep getting these narratives about the mounting credit card debt, how obviously more Americans are living paycheck to paycheck, and then FICO coming out with a report saying that the average FICO score has gone up versus the past year. How do you– when you look at that data as a whole, is it because there’s some sort of lag or is there some sort of other shoe to drop that hasn’t made its way into these credit scores yet?
Matt Schulz: Well, credit scores are kind of a lagging indicator, but they’re also just kind of imperfect by nature. For one thing, it doesn’t necessarily show where people stand with student loan repayments and how able they are to make those. And even when student loan payments crank up in full, those defaults and delinquencies won’t be reported for another year, so that’s going to be another gap.
And then another big thing that’s missing from these FICO scores and all credit scores is buy-now-pay-later loans, and we know that those are a huge phenomenon. There’s a lot of money in those. And even though those tend to be short-term debt, they are still impactful as to the average consumer’s financial situation. So there are so many X factors, it’s just a funky time in the economy generally. So it’s all of these numbers give these kind of mixed answers.
And Matt, of course, we’re seeing all this against the backdrop of rising rates and, you know, if people have checked their credit card lately, those rates are really high when you compare to where they were several years ago. We’ve had a number of guests that have come on who’ve said, look, sometimes you can call your credit card company to see if you can negotiate a rate down. What do you advise there, specifically for those consumers who have high debt given just how that could really ding their credit score?
MATT SCHULZ: You absolutely positively can call your credit card issuer and ask for a lower interest rate. We’ve been tracking this for a few years at LendingTree. And when we did a survey earlier this year, we found that 76% of folks who asked for a lower interest rate on their credit card in the past year got one, and the average reduction was about 6 points. So that’s the equivalent of going from 25% to 19% on your credit card APR. And that’s a really big deal.
And with that type of success rate, 76%, it shows that it’s not just people with 750 credit scores and long track records that are getting their way, it’s people who need help, it’s just regular folks who are struggling along. So it’s a really good idea to make that call maybe use an offer that you’ve seen at LendingTree, or in your snail mail, to help kind of frame that conversation and see if your credit card issuer will match that other offer. It’s such a competitive marketplace now, there’s a good chance that they’ll at least listen to you.
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