Ah, the good ole’ days, when a 700 credit score meant something. These days, according to analysts and economists from both Goldman Sachs and Moody’s Analytics, a 700 credit score is just “average” and the financial services industry should be prepared because inflated credit scores are masking individuals’ inability to pay their debts.
Anyone that is using credit scores as part of a model to identify risk or a borrower’s likelihood of being able to repay a debt is “possibly understating the risk,” said an analyst with Goldman, according to a published report. There are 15 million more people with a credit score of 740 or higher today than there were 10 years ago, and there are 15 million fewer people with a credit score of 660 or below today than there were 10 years ago, according to data from Moody’s. What that could mean, according to Moody’s, is an individual with a credit score of 660 today is likely in a poorer financial condition than individuals who had a credit score of 660 a decade ago.
“Cracks” have already begun to show in the portfolios of some lenders and creditors that specialize in working with individuals who have subprime credit scores, even though the economy has been growing. Now that economic growth is starting to slow, those financial cracks could widen and catch more individuals who will have problems paying their bills.
“Borrowers’ scores may have migrated up, but inherently their individual risk, and their attitude towards credit and ability to pay their bills, has stayed the same.” said Cris deRitis, deputy chief economist at Moody’s Analytics. “You might have thought 700 was a good score, but now it’s just average.”