The latest data from WalletHub paints a worrying picture.
In the last year, the average credit score in every US state has dropped, indicating that financial strain is not limited to a specific region but is systemic.
The New York Federal Reserve reported that consumer debt will reach nearly $8 trillion in the third quarter 2024, a record high.
This decline is due to a combination of factors including rising inflation, increasing delinquency, and increased credit usage. It has become increasingly difficult to meet financial obligations for Americans.
These issues have a wide-ranging impact, affecting household budgets in many ways, including limiting access to credit and increasing costs of loans, insurance, or both.
Why is the national drop so high?
WalletHub’s analysis reveals the main reasons for the drop in credit scores are rising debts and poor financial management.
Americans increasingly use credit cards to pay for everyday living expenses, despite rising costs.
The inflation has driven the price of necessities like housing, food and transportation up to record highs.
According to WalletHub the average American household will have more than $104,000 of consumer debt at the end 2023. This represents an increase of 11% in just three years.
Delinquency has also risen across credit products including auto loans, mortgages and credit cards.
Overextending credit limits is another important factor.
The lower the score, the higher is the utilisation rate – how much credit has been used in comparison to what’s available.
Borrowing has become more costly due to the Federal Reserve’s aggressive rate increases in 2023-2024. This further limits consumers’ capacity to pay back debts.
Disparities in regional disparities
The WalletHub Report highlights regional differences in the decline of credit scores.
Alaska has seen the largest decline in scores, followed by Vermont and Mississippi. Alaska is the leader with a drop of 1.02%.
In these areas, the high levels of debt on credit cards per capita as well as weak economic conditions pose a challenge.
Maine, Oregon and Kentucky, on the other hand, have seen a decline of only 0.15%.
The residents of these states are able to better manage their credit despite the national economic pressures, thanks to lower debt levels.
Credit risk can be mitigated by educating yourself and planning your finances.
What ripple effects can a decline in credit score have?
Credit scores are declining, and this has wider implications both for consumers as well as the economy.
A lower credit score can mean fewer options for loans, credit cards and interest rates. It could even be a barrier to obtaining employment or housing.
Lenders will tighten up their credit criteria as scores fall, further limiting the availability of credit for those in need.
Lower consumer credit scores for businesses can have a negative impact on spending, especially when it comes to big ticket items such as cars and homes.
The shift in consumer spending could have a ripple effect across all industries and slow economic growth, at a moment when people are worried about the potential of recession.
How to navigate the recession
Individuals can protect their financial well-being by taking proactive measures despite these difficulties.
Credit scores can be improved over time by reducing credit card debt, making timely payments and restricting new credit applications.
Monitor your credit report regularly in order to detect and correct any errors which could lower your score.
To reverse this trend, it is important to improve financial literacy as well as address inflationary pressures.
Together, policymakers and financial institutions should provide consumers with resources to help them develop better financial habits.
This article Why is credit scores dropping in America WalletHub presents new data first appeared on The ICD
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