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Credit card holders and their credit scores

New insights from the Research Division of the St. Louis Fed

Your credit report is a record of your credit history that includes information about your identity, outstanding balances and history of making payments, publicly available information, and inquiries made by organizations or individuals about your credit history. Your credit score is a number that reflects the information in your credit report. See this Consumer’s Guide from the Board of Governors of the Federal Reserve to learn more about it.

Credit scores are used by lenders when deciding whether to grant you credit, what terms you are offered, or the rate you will pay on a loan.

The FRED graph above shows data from the Federal Reserve Bank of Philadelphia about the change in credit scores by three groups of credit card holders: those with the lowest 10% of credit scores (the blue line); those with the lowest 25% of credit scores (the red line); and those with median, or middle-of-range, credit scores (the green line). Personal credit scores may change from quarter to quarter, so individual credit card holders could potentially move between groupings. The data were transformed into a custom index with a value of 100 in the third quarter of 2012, the first available observation, to highlight a striking feature of their recent changes.

During the onset of the COVID-19 pandemic, the credit scores of many credit card holders increased noticeably. This jump in scores was pretty much irrespective of how high or low those scores were to begin with. More flexible repayment terms on existing debts, reduced spending during the periods of lockdown and social distancing, and substantial income subsidies provided by the government improved the credit scores of many people. However, all those factors boosting personal finances were temporary.

Recent research from Juan M. Sánchez and Masataka Mori at the St Louis Fed finds some evidence that many individuals who experienced a fast improvement in credit scores during the COVID-19 pandemic are not as financially stable as those who improved their credit scores after the 2007-2009 recession, also known as the Great Recession. As a consequence, people who were likely to be financially distressed prior to 2020 and saw their credit scores improve during the pandemic also make up a significant proportion of credit card holders recently missing multiple payments on their existing credit card balances. In short: Their credit scores may have improved, but their long-term underlying ability to repay a loan in time did not.

For more about this and other research, visit the website of the Research Division of the Federal Reserve Bank of St Louis, which offers an array of economic analysis and expertise provided by our staff.

How this graph was created: In FRED, search for “Large Bank Consumer Credit Card Balances: Current Credit Score: 10th Percentile.” From the “Edit Graph” panel, use the “Add Line” tab to search for and select “Large Bank Consumer Credit Card Balances: Current Credit Score: 25th Percentile.” Repeat the last step to add the third series, “Large Bank Consumer Credit Card Balances: Current Credit Score: 50th Percentile.” Next, select the “Edit Line 1” tab to customize the units by selecting “Index (Scale value to 100 for chosen date)” and enter “2012-07-01” in the date box. Click on “Copy to all” to apply the unit transformation to all the series.

Suggested by Diego Mendez-Carbajo.

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