Credit scores drop at fastest pace since the Great Recession

U.S. credit scores are experiencing their sharpest decline since the Great Recession, with the national average FICO score dropping two points this year, primarily due to rising living costs and the resumption of student loan payments. Delinquency rates on auto, credit card, and personal loans are nearing 2009 levels, particularly impacting younger Americans, with Gen Z experiencing a three-point average score drop and record-high student loan delinquencies. This trend signals significant financial stress for a substantial portion of the population, indicating a K-shaped economic recovery and consumer credit conditions more akin to a recession than an expansion, despite broader market strength.

Analysis

U.S. consumer financial health is deteriorating at its most rapid pace since the Great Recession, signaling potential headwinds for the broader economy despite record-high equity markets. The national average FICO score has fallen by two points, the largest drop since 2009, driven by high living costs and the reinstatement of student debt payments. This macro trend is underpinned by alarming micro-level data: delinquency rates for auto loans, credit cards, and personal loans are now at or near their 2009 peaks, a condition FICO characterizes as more consistent with a recession than an expansion. The pressure is most acute on younger demographics, with Gen Z borrowers experiencing a three-point average score decline and a record-high 29% delinquency rate on student loans among those with payments due. This financial stress is forcing behavioral changes, as 64% of Gen Z and 61% of Millennials with student loans are using other credit to bridge financial gaps, and 19% of all consumers are skipping or reducing bill payments. The situation highlights a significant K-shaped divergence, where wealth tied to assets is performing well while a large segment of the population, particularly younger individuals facing a difficult job market, is experiencing escalating credit-related stress.

Key Decisions for Investors

• Investors should re-evaluate exposure to consumer finance companies, particularly those with significant portfolios in subprime auto and unsecured personal loans, given that delinquency rates in these sectors are approaching levels last seen during the 2008 financial crisis.
• Consider underweighting consumer discretionary stocks that heavily target younger and lower-to-middle income demographics, as this segment is demonstrating clear signs of financial distress, including credit score degradation and reduced spending capacity.
• Closely monitor upcoming consumer credit reports and labor market data for new graduates, as these will be critical leading indicators for determining if the observed credit deterioration is a contained issue or the beginning of a broader economic slowdown affecting consumption.