Credit Card default rates rose for the fourth-consecutive month in March and now are at their highest level since July 2012, according the S&P/Experian Consumer Credit Default Index.
In another potential warning sign for the consumer economy, mobile-home loan delinquencies are at their highest level since 2015, according to UBS.
Still, the overall delinquency rate was unchanged in March—the most recent data available. And David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, remains upbeat about the state of the consumer.
"The recent volatility in the stock market has not affected consumer sentiment and spending," Blitzer says. "The default rate on bank cards continues the modest increases seen in recent months while default experience on mortgage and auto loans is little changed. The favorable economic environment of stable inflation and unemployment explains the positive results seen in mortgages and auto loans. At current levels, the bank card numbers are not a cause for concern."
The S&P/Experian Consumer Credit Default Index measures consumer credit defaults sourced from lenders across four key loan categories: auto, bankcard, first mortgage lien, and second mortgage lien.
How Delinquency Rates Affect Your Credit Score
Delinquency rates matter to lenders because they represent your ability to pay back a loan or other debt and helps to determine whether you are viewed as a reliable borrower or not. It also plays a major factor in your credit scores.
While the various scoring models used can be slightly different, there are two common credit score factors:
- Payment History: This information can positively affect your credit scores if you have a history of paying all your bills on time all the time. However, late or missed payments will negatively affect your credit scores.
- Credit Utilization Rate: The total amount of credit you have available, based on credit card limits, compared to the amount of credit you're actually using (credit card balances) is also a common credit score factor. A low credit utilization ratio indicates your ability to manage credit well, and many lenders like to see ratios of 30% or less.
If you are delinquent on your payments then chances are that your credit scores are going to suffer as a result. Looking at payment history data for people who have a very poor FICO® Score (580 and below), 31% had a payment that was 30 days past due, while the overall consumer average was 22% in the fourth quarter of 2017.
For credit utilization rates, people with a FICO® Score considered very poor had a credit utilization rate of 92%, while the overall average was 42.5%. It is recommended to keep your total credit utilization rate below 30% to show you're doing a good job of managing your credit responsibilities. For example, if your total credit limit is $10,000, your total revolving balance shouldn't exceed $3,000.
How Income Affects Your FICO® Score?
Income does not play a factor on your credit report and is not considered in your FICO® Score. Lenders are interested in your credit history and your responsibility in repaying your debts, regardless of how much (or how little) money you make.
In fact, income doesn't diverge from overall income as one might think when correlated with the FICO® Score ranges. People with lower or higher income have the same financial issues as all score ranges in terms of "living within one's means" when it comes to credit usage. When it comes to budgeting, if you are not responsible with your money then you can end up overextending yourself—no matter how much money you make.
Remember that paying your bills on time will always contribute significantly towards achieving better credit scores. If you can pay down your debt or consolidate your debt, it will help improve your credit utilization ratio, while avoiding delinquency, another factor that lenders examine.