From Tony Hughes at Economy.com (sorry, no link), a conundrum: How is it that credit scores have risen at the same time that consumer delinquency rates have gone up? Weird, but true. Take a look:
Payment patterns, recall, constitute a major input to the credit score’s calculation. So as more people pay their bills late, by definition, the average FICO should fall, not rise. But that hasn’t happened. Hughes offers four possible explanations:
- People have learned to game the system. They accept line increases (which raise scores) when offered, for instance, even if they have no intention of using them. Or they might even pay to piggyback on another, high-score consumer’s card. The moves reflect the individual’s understanding of how credit scores are tallied, not changes in his actual creditworthiness.
- People (especially those with high credit scores) are using their credit cards more than ever. Higher usage means a thicker credit file, and thick credit files tend to make for high scores.
- Because of a quirk in how they’re calculated, credit scores haven’t adequately taken into account the broad rise that’s occurred in mortgage delinquencies. A consumer’s score tends to get dinged when the consumer’s payment pattern varies from the broad average, but when the broad average itself shifts, changes in scores might not adequately reflect broad changes in creditworthiness.
- Consumer card balances are rising. In the past, high balances have correlated with strong consumer creditworthiness. Perhaps no longer, however. Consumer confidence is in the tank and the HELOC spigot shut off for many borrowers, so rising card balances could be a sign, if anything, of rising consumer desperation.
Hughes says that all this suggest that “the relationship between credit scores and the underlying probability of default is breaking down.” He’s on to something, I suspect. . . .
