FICO Inc., the company that provides the credit scores 90 percent of lenders evaluate consumer credit risks, just released a survey of Americans' credit scores as of April and how they compare to consumers' creditworthiness historically.

The report shows an interesting and disturbing trend: sharp growth in the percentage of consumers with very low or very high credit scores, and a corresponding collapse in the percentage of American consumers with average credit.

These numbers seem to indicate a trend in Americans' credit fortunes similar to the well documented growth in the divide between the extremely wealthy and the insolvent. Are we facing a "shrinking middle class" in the availability and cost of credit?

What Does FICO's Latest Analysis Show About Americans' Credit Scores?

The newest numbers from FICO represent April data. The up-shot of the report is that the percentage of consumers in the mid-range groups representing "fair," "moderate" and "good" credit scores is dwindling, from 45 percent of active consumers historically to only 37.1 percent now.

The percentage of consumers at the ends of the spectrum has risen sharply, with the percentage at the extreme top end (800 or higher) showing a dramatic increase from an historical average of about 13.33 percent to 18.7 percent in April.

The percentage of those with "poor" credit scores (between 300 and 599) also mushroomed from the historical average of 15 percent of active consumers to a shocking 25.5 percent in April. That represents an addition of nearly 2.4 million people to the ranks of those who will pay the most for credit, if they can get it at all.

Who Will Be Affected Most by the "Shrinking Middle Class" of Credit Scores?

This trend is likely to affect those in the middle ranges the most. Having the spread weighted at the ends is likely to affect banks' lending behavior. Fewer credit products are likely to be offered or demanded by those on the lower end of the scale, and banks will likely compete heavily for clients whose credit scores are at the top end.

Consumers with mid-range scores usually had access to credit at reasonable rates before the economic meltdown. Today, it's increasingly difficult for them to find banks who are interested in lending to them, even though their mid-range scores rarely indicate insolvency.

Do Lenders Rely Too Much on FICO Credit Scores?

While studies generally show FICO scores to be reliable predictors of a consumer's payment behavior, they have at least one major drawback: They offer no way to differentiate between two people with the same credit score.

For example, a consumer whose home foreclosure was the result of irresponsible borrowing might have a FICO score of 590. But so might the consumer whose foreclosure was the result of mortgage fraud.

Banks do want to make those kinds of distinctions, according to Edmund Tribue, a senior vice president in the credit risk practice at MasterCard Advisors. He admits that in the past, credit was often offered based on FICO scores alone. However, the very things about which FICO scores only provide a general gauge -- consumers' ability to repay and likelihood of doing so are critical parts of lending decisions.

Related Resources:

  • "More Americans' credit scores sink to new lows" (Associated Press, July 12, 2010)
  • "Record Low Credit Scores Prove Two-Class Society Strengthening in US" (Wall St. Cheat Sheet, July 12, 2010)