Why are credits scores falling in America? WalletHub unveils new data

American credit scores are on a downward trajectory, and WalletHub’s latest data paints a concerning picture.

Over the past year, every state in the US has experienced a drop in average credit scores, signalling that the financial stress is not confined to specific regions but is a systemic issue.

This troubling trend coincides with record-high consumer debt levels, as reported by the New York Federal Reserve, which reached nearly $8 trillion by the third quarter of 2024.

Inflationary pressures, rising delinquency rates, and higher credit utilisation have all contributed to this decline, making it increasingly difficult for Americans to manage their financial obligations.

The impact of these issues is far-reaching, from limited access to credit to higher costs for loans and insurance, further straining household budgets.

What’s driving the nationwide drop?

WalletHub’s analysis reveals that the credit score drop is primarily driven by rising consumer debt and financial mismanagement.

Americans are increasingly relying on credit to cover everyday expenses amid higher living costs, leading to elevated credit utilisation.

This issue is exacerbated by inflation, which has pushed the cost of essentials like food, housing, and transportation to new highs.

According to WalletHub, the average American household carried more than $104,000 in consumer debt by the end of 2023, an 11% increase over three years.

The rise in debt has also contributed to a surge in late payments, with delinquency rates climbing across all credit products, including mortgages, auto loans, and credit cards.

Another significant factor is the overextension of credit limits.

Higher utilisation rates—how much credit is being used compared to available limits—are negatively impacting scores.

The Federal Reserve’s aggressive interest rate hikes in 2023 and 2024 have also made borrowing more expensive, further straining consumers’ ability to repay debts.

Regional disparities

While the credit score decline is universal, the WalletHub report highlights significant regional disparities.

States like Alaska, Vermont, and Mississippi have seen the steepest declines, with Alaska leading the pack at a 1.02% drop in average scores.

High levels of credit card debt per capita and weak economic conditions are common challenges in these regions.

In contrast, states such as Maine, Oregon, and Kentucky have been less affected, with declines of just 0.15%.

These states benefit from lower overall debt levels and better financial literacy, enabling residents to manage their credit more effectively despite national economic pressures.

The difference in financial behaviour between states underscores the importance of education and financial planning in mitigating credit risks.

The ripple effects of declining credit scores

The decline in credit scores has broader implications for both individual consumers and the economy.

Lower credit scores mean reduced access to loans and credit cards, less favourable interest rates, and even potential obstacles in securing employment or housing.

As scores drop, lenders are likely to tighten their criteria, further restricting credit availability for those who need it most.

For businesses, lower consumer credit scores can impact spending patterns, particularly for big-ticket items like homes and cars.

This shift in spending behaviour could ripple across industries, potentially slowing economic growth at a time when many are already concerned about the possibility of a recession.

Navigating the downturn

Amid these challenges, individuals can take proactive steps to protect their financial health.

Reducing credit card balances, maintaining on-time payments, and limiting new credit applications can help improve credit scores over time.

It’s also essential to monitor credit reports regularly to identify and address errors that could drag scores down.

On a systemic level, improving financial literacy and addressing inflationary pressures are critical to reversing this trend.

Policymakers and financial institutions must work together to provide resources and support that enable consumers to build stronger financial habits.

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