Beware of Credit Score Inflation
America’s credit scores have improved along with the improving economy. Compared to 2006, there are approximately fifteen million fewer Americans with credit scores below 660 and a corresponding increase of fifteen million Americans with scores greater than 740.
That’s good news, with a potential downside. Federal Reserve research suggests that we’re experiencing credit score inflation, similar to grade inflation in college. The economy is doing so well that the true risk of marginal borrowers may not be properly represented. Analysts are concerned that today’s consumer with a credit score of 660 – considered the boundary for subprime lending – may reflect higher risk than a consumer with a 660 credit score a decade ago.
Consumers may be doing okay now with a 660 score in a strong economy, when they are more likely to have a decent paying job – but what happens in tougher times? Are they properly prepared for an ec…