The average consumer FICO scores might look great, but there’s more to it than meets the eye.
Today, we’ll tell you about the current state of consumer financial health. If you want to learn more, continue reading below.
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The average consumer FICO scores might look great, but there’s more to it than meets the eye. FICO is the most commonly accepted consumer credit score as it is used by 90% of the U.S.’ top lenders to aid them on who to give loans to. In other words, anyone with a credit card has a FICO score. FICO scores range from 300 to 850, with anything below 580 considered “poor” and anything above 739 considered “very good” or “exceptional.” According to the latest FICO report released in October 2023, the average score was 717, which was considered as a “good range.” The latest FICO report paints a picture of consumer resilience despite inflationary pressures and high interest rates. However, there are signs pointing to the fact that the consumer might not be doing so great. Why? Companies producing consumer staples like Target and Starbucks have reported poor earnings. Starbucks missed expectations for both revenue (down 2%) and earnings (down 15%) in the second quarter of 2024. Meanwhile, Target missed earnings expectations and warned investors not to expect better results in the next few quarters.
Companies that produce consumer staples are good indicators of consumer health because they sell products that consumers buy on a daily basis. Once these firms start missing out on earnings and revenue targets, it’s a sign that their customers are struggling too. Credit Ratings Only Tell a Part of the Whole Story There’s a clear disconnect between the October 2023 FICO score and what companies like Starbucks and Target are reporting. It is because there’s a certain type of debt that credit ratings agencies don’t include: Buy now, pay later (BNPL) loans. Basically, BNPL loans, a.k.a. “phantom debt,” allow consumers to pay for online purchases in interest-free installments. For example: Instead of paying USD 200 upfront for a pair of shoes online, you can divide your purchase into multiple payments stretching over a few months.
BNPL loans enable consumers to delay paying for goods without having to get approved the same way they do for an auto loan. As a result, the “debt” generated by BNPL purchases never shows up on a person’s FICO score. Unfortunately, some folks are starting to fall behind on their BNPL payments. While BNPL loans may not affect credit scores on paper, there’s another metric where they can show up: Delinquency rates. Delinquency rates include all loans including BNPL loans, which makes the metric a much better indicator of consumer health. Delinquencies on BNPL loans have seen an uptick since consumers are starting to rely more and more on this type of debt. According to a February 2024 report from the New York Federal Reserve, 90-day-plus credit-card delinquency rates rose from 8% to nearly 11%. Delinquencies of this type shows that consumers are holding off on paying their bills for as long as possible, regardless whether credit agencies see it or not. To make matters worse, auto and other severe loan delinquency rates are on the rise. Simply said, the financial health of consumers don’t look good… and it’s clear that BNPL loans are contributing since its market has grown every year since 2020. BNPL purchases are expected to reach nearly USD 700 billion by 2028, a massive jump compared to the USD 33 billion record in 2019 and USD 300 billion in 2023. Bloomberg surveys also found that 43% of consumers are behind on their BNPL payments, and 28% were late on other debt because of BNPL payouts. The key takeaway? Even though the average FICO score might paint a rosy picture of consumer financial health, keep in mind that it and other credit metrics don’t take into account BNPL loans. Credit card delinquency rates are at the highest level in more than a decade and are likely to limit consumer spending moving forward. ANNOUNCEMENT: Discover the key to navigating the lucrative world of resource investing! On July 7 to 11, 2024, The Rick Rule Natural Resource Symposium will return to The Boca Raton in Florida to deliver unparalleled and profitable insights on resource and commodities investing. In this one-of-a-kind event, you’ll have the chance to get front-row access to exclusive insider insights, participate in sponsored breakfasts, lunches, breakouts, and panel sessions, as well as join first-class celebrations with an exciting speaker lineup. My friend and colleague, Professor Joel Litman, will be speaking in this symposium. I highly encourage you to join this event! This symposium is thoughtfully crafted to ensure you walk away with your own personalized resource and commodities investment plan for the year ahead. Register now through this link to secure your slot. You have an option to register as an onsite attendee or via livestream only. Hope to see you there! Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. The barriers to entry have never been lower for talented professionals to work independently, and today’s massive external workforce is hardly a pandemic-produced fad. Business owners can only survive in the new work landscape by partnering with this deep talent pool. With decades of experience in both small-business entrepreneurship and executive management at PwC, I truly believe that the future of work is independent. With that, I’m happy to share with you that my book, co-authored with Walter Scott Lamb, is now available for pre-order on Amazon! Free Birds Revolution: The Future of Work & The Independent Mind This is an essential read for both independent professionals and corporate executives. Here, we provide educational and practical guides to unpack the ever-growing workforce and offer you crucial ways to become a client of choice. Click on the link above to pre-order your copy. Let this book help you future-proof your career and organization in the new world of work. Stay tuned for next Wednesday’s The Independent Investor! There’s an issue that has been concerning big banks in the U.S. since last year: Private equity (PE) has overstayed its welcome. Learn more about whether or not corporate credit (at least in the U.S.) is in good shape this year in next week’s article! |
