If you look at the average FICO score, the U.S. consumer is in great shape...

FICO is the most widely accepted consumer credit score... It's used by 90% of the country's top lenders to help them make decisions on loans. Basically, anyone with a credit card has a FICO score.

It typically ranges 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, the average score is 717. That's smack in the middle of the "good" range... and just one point off the all-time-high average score.

That paints a picture of consumer resiliency... Yet, there are also clear signs that the consumer is doing not so great.

Consumer-staples companies like Target (TGT) and Starbucks (SBUX) are reporting poor earnings. Starbucks missed expectations for both revenue and earnings, with those figures down 2% and 15%, respectively, in the second quarter. And Target is still hurting from inflation... It also missed earnings expectations and warned investors not to expect better results in the next few quarters.

Consumer-staples companies are good indicators of consumer health because they sell products that consumers buy on a daily basis... So if they're suffering, it's a sign their customers are, too.

There's a clear disconnect between today's average FICO score and what these companies are reporting... and it's because there's a certain type of debt that credit-ratings agencies don't include.

Credit ratings don't tell the whole story...

Consumers are piling up on what's called "phantom debt"... otherwise known as "buy now, pay later" ("BNPL") loans.

These loans allow consumers to pay for a lot of online purchases in interest-free installments.

So instead of paying $100 up front for a pair of shoes online, you can divide your purchase into multiple equal payments over a few months.

BNPL loans technically aren't debt... but they're a way for consumers to delay paying for goods.

And customers don't have to get approved in the same way they do for an auto loan, so "debt" generated by BNPL purchases never shows up on your FICO score.

These loans are stacking even more obligations on people's plates, and folks are starting to fall behind on their payments.

That said, while credit scores may not include BNPL purchases, these loans can't hide from every metric...

Delinquency rates include all loans that are past due...

That makes them a much better indicator of consumer health.

They take into account mortgage balances, which increased by $190 billion in the last quarter... and total household debt, which rose by $184 billion.

Delinquency rates also include BNPL loans. And they've been on the rise as more and more folks have relied on these types of loans...

According to data by the New York Federal Reserve, 90-day-plus credit-card delinquency rates rose from 8% to nearly 11% in the last year.

These types of delinquencies are the most serious. And the fact that they're rising signals that folks are holding off on paying their bills as long as possible... whether or not the credit agencies see it.

Moreover, auto and other severe loan delinquency rates are also rising. Overall, it's just not a great look for the consumer.

And it's clear that BNPL is contributing, as its market has been growing every year since 2020.

BNPL purchases totaled $33 billion in 2019... climbed to $300 billion in 2023... and are now expected to reach nearly $700 billion by 2028.

Recent Bloomberg News surveys also show that 43% of people are behind on their BNPL payments... and 28% of folks were late on other debt because of their BNPL payments.

So while the average FICO score may tell the story of a healthy consumer, keep in mind that those credit metrics don't take into account phantom debt.

Consumers' obligations are piling up. Credit-card delinquency rates are at the highest level in more than a decade. And that's likely to limit consumer spending going forward.


Joel Litman
June 10, 2024