Consumer credit scores have been artificially inflated over the last decade ears and are covering up a very real danger lurking behind hundreds of billions of dollars in debt. And when Goldman Sachs is the one ringing the alarm bell, you know the issue may actually be serious.
Joined by Moody's Analytics and supported by "research" from the Federal Reserve, the steady rise of credit scores during our last decade of "economic expansion" has led to a dangerous concept called "grade inflation", according to Bloomberg.
Grade inflation is the idea that debtors are actually riskier than their scores indicate, due to metrics not accounting for the "robust" economy, which may negatively affect the perception of borrowers' ability to pay back bills on time. This means that when a recession finally happens, there could be a larger than expected fallout for both lenders and investors.
There are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.
On the surface, this disappearance of subprime borrowers is good news. But is there more than meets the eye to the American consumer's FICO score renaissance?
Cris deRitis, deputy chief economist at Moody’s Analytics said: “Borrowers with low credit scores in 2019 pose a much higher relative risk. Because loss rates today are low and competition for high-score borrowers is fierce, lenders may be tempted to lower their credit standards without appreciating that the 660 credit-score borrower today may be relatively worse than a 660-score borrower in 2009.”