Credit Scores dropping Nationwide – Why?

There is a lot of discussion right now about the apparent drop in credit scores.  It is not a dramatic change in score quality, but it is dramatic for its widespread impact.  Nationally, the average credit score (TransUnion) dropped by six points, to 651. In some states, the impact is especially poor – places like California and Arizona have seen average credit scores in their states drop by more than 10 points.

Here is a recent story documenting the scope of the changes in credit scores. This story attributes most of the change to unemployment and other macroeconomic forces.

What could be the root of this problem?  Yes, unemployment is probably part of the explanation for the drop in credit scores.

Still, a part of it could be driven by the cutting back of credit to consumers on the part of banks. When a bank reduces a credit limit, it increases the percentage of debt owed by a consumer on their account. Credit card utilization rates soar, without any change in borrower behavior.  That’s a strong factor in credit scoring.

There are other things that a bank can do, particularly with credit cards, to deflate credit scores.  If an account is closed, that is also a negative, because it takes away accounts with longer durations.