Responsible credit usage is an important part of personal financing, however, on a national level, there remain many concerning facts about the state of America’s credit management. A recent report on America’s credit health broke down how credit is used in the United States based on a variety of different means of sorting individuals into groups and there is a lot of valuable information which can be gleaned from looking over the data. Here are the six biggest takeaways about the state of America’s credit health and how those revelations may be affecting you without you even realizing it.
If you speak with a credit professional they will tell you that your income and finances do not factor into the score you receive from credit reporting agencies. It is true that neither your income statements or bank records are used as part of the formulas for your credit scores, however, that does not mean that there are not correlations associated with income.
There is a significant link between the average household income reported in states and the average credit score in the state. This is likely attributed to the ability to manage credit which comes from having more income. Although earning more does not show up directly in your credit score, it does mean you are better positioned to pay your cards on time, avoid derogatory marks and minimize your credit card utilization.
Credit is Being Pushed to the Limit
One of the biggest factors in determining your credit score is also one of the most common factors harming American’s credit ratings. Your credit card utilization, which is the percentage of available credit from your different credit cards you are using, is one of the three primary factors in the formulas used to calculate scores. In order to have a strong rating for credit card utilization, it is recommended that you remain under 30-percent utilization. If you have high utilization you should prioritize paying down your cards in order to lower that number as it can lead to a significant jump in your credit score.
Unfortunately, not everyone is able to live by those standards, and a significant portion of the American population currently has extremely high credit card utilization which is causing their score significant harm. Less than 30-percent of accounts analyzed were actually under that 30-percent threshold. More alarmingly, more than half of all Americans had credit card utilization numbers in excess of 70-percent, resulting in the lowest possible score for utilization. This is a worrying trend that shows that many Americans are overleveraged on their credit accounts.
Home Owners Have High Scores
One area the report looked at with results that may be surprising is that there is a marked difference between homeowners and renters. This could be surprising to you if you have purchased a home and noticed that immediately following the purchase of the home your credit score took a dip as a result of the new liabilities. While it is easy to assume that with all homeowners who took on mortgages experiencing that same drop it would result in lower overall scores, there are other considerations at play.
In order to qualify for a home loan, you will need to meet a minimum score requirement that varies by how large of a loan you would require and where you are looking to buy. Additionally, many people who are looking to purchase a home will begin preparing by working on their credit as much as several years in advance. The net result means that while the moment of purchase leads to a credit score dip, this is outweighed by the work and prior responsible behavior which is needed to make that purchase possible in the first place.
Not All States are Equal
Although a large number of residents in a sample size covering an entire state has the effect of pulling average scores closer together, that doesn’t mean there aren’t still clear differences among states and regions. There is a spread of over 60 points between the state with the highest average credit score, Massachusetts’ 636, and the lowest, Mississippi’s 572.
Beyond state differences, a map of the scores shows geographic differences spread past state borders. The most well-off regions of the country in terms of credit scores are the west coast and the northeast, with all states west of Arizona or northeast of West Virginia scoring above average. Less fortunate are residents of the south and midwest, with the majority of the lowest-rated states all clustered together in those regions.
Big Tech Leads to Big Scores
When the data is examined more closely than a state level, one common trend emerges, and that is the value of association with major technological companies. High credit score hotspots exist in Seattle, New York City and California’s Silicon Valley, all areas which benefit from the presence of major technology companies.
Tech remains a rapidly growing industry and one in which massive amounts of capital are being spent every year. This leads to many opportunities for locals to work at and benefit from these companies, and in-turn higher wages which correlate with higher credit scores.
Struggling Communities Struggle With Scores
On the flip side of the coin, the unfortunate correlation is that cities that struggle financially also tend to struggle with credit health, as well. Many of the ZIP codes which dipped below 540 were also locations where the average family income was less than half of the national income. Just as the influx of money helps tech-adjacent cities’ scores soar, the difficult conditions in these cities often result in lower scores.
The findings of this national credit health report provide interesting insights into the way that credit is managed around the United States. In addition to the value of seeing how credit scores are linked to other parts of your life, there are also lessons on credit utilization and borrowing within your means as well. If you follow the lead of those with high ranking scores, you too can raise your credit in time.