The national average FICO score in the United States experienced a slight drop in February, largely as a consequence of federal student loan defaults. This marks the first time in half a decade that such delinquencies have begun to influence credit reports.
In February, the average U.S. FICO credit score slipped to 715-a minor decrease from the prior month and two points beneath its level in April 2024. Tommy Lee, the senior director of analytics and scores at FICO, attributed a large portion of this downturn to student loan defaults.
Amid the COVID-19 pandemic, repayments on federal student loans were paused until October 2024, but once resumed, any missed payments did not appear on credit records until February, due to a grace period provided by the government.
The Federal Reserve Bank of New York initially projected that approximately 9.7 million borrowers would witness a slump in their credit ratings owing to overdue student loan debt. FICO states, however, that only around 2.7 million borrowers had their defaults reported to credit bureaus as of February.
Nevertheless, more reports of student loan default are anticipated in the upcoming months. Despite these delinquencies not yet being registered, FICO reports that around 5.4 million individuals have not made any student loan payments since the hiatus ended.
For the first time since the pandemic's onset, all loan default rates have exceeded the pre-pandemic benchmark of 8.1% set in January 2020. There was an escalation to 8.3% in February, in the percentage of consumers enduring over 90 days of delinquency in the prior six months, from 7.4% in the preceding month. This rise was largely linked to the reporting of student loan delinquencies, according to FICO.
Moreover, the impact of student loan defaults on the average FICO score was potentially mitigated by a decrease in credit card balances. There was a reduction from January to February in average credit card utilization-the proportion of a borrower's total accessible credit being utilized. As individuals settled their holiday debts, balances reduced, thereby uplifting the average FICO score and counterbalancing some of the decreases instigated by missed student loan repayments.