PERSONAL FINANCE

Average credit scores stopped jumping. Is that a sign of a recession?

The credit-score party is over.

Americans' credit scores remarkably hit new highs despite historic levels of unemployment and a shuttered economy prompted by the pandemic.

Now – for the first time in more than a decade – Americans' scores held steady at 716 year-over-year from April 2021,  effectively ending the year-over-year improvement in average FICO scores.

Is that a sign a recession is on the horizon? 

In a sense, yes. But it may be too early to tell, said Ethan Dornhelm, FICO's vice president of scores and predictive analytics.

"The FICO score is a lagging, but not a leading economic indicator," he told USA TODAY. "The FICO score isn't going to tell you that a recession is imminent," rather he said, "it will tell you that a recession happened and that consumers are really under financial stress."

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Average FICO scores climb

Before the pandemic, average FICO credit scores hovered below 710. But from April to October 2020, average credit score jumped an unusually high five points to 713, and continued to grow through April of last year.

A FICO score between 670 to 739 is considered good; 740 to 799 is very good, and above that is exceptional. A FICO score below 670 is either considered fair or poor.

Helped by enhanced unemployment benefits, stimulus checks, mortgage forbearance and other pandemic-relief programs, Americans were able to pay off debt. Additionally, they were spending conservatively and adding to their savings when vacations and other opportunities to spend money were heavily restricted by COVID-19. 

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For the first time in over a decade credit scores held steady, according to new FICO data.

These factors worked to boost Americans' credit scores. But since the bandage has been ripped off for most stimulus programs, and inflation is at a near-40-year high, credit-score growth is constrained, Dornhelm said.

"What leveling off tells us is, things have just started softening a bit, which isn't particularly shocking given the incredible heights which we're coming from," he said. "All we're seeing right now is a very modest deterioration in some aspects of consumers' credit behavior in aggregate."

That's coming from a rise in payments that are more than 30 days late, an uptick in the amount of debt consumers are taking on, and new accounts they're opening, according to a FICO report published Tuesday.

Student-loan forgiveness could cause credit scores to rise again

President Joe Biden's recently unveiled plan to cancel up to $20,000 in student loan debt for certain borrowers could improve credit scores, Dornhelm said.

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It helps borrowers "have more cash flow to pay across all of their obligations," he said. "They're not having to pick and choose and prioritize which payments they're going to make."

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here