I’m about as pro-Texas as you can reasonably (some would say unreasonably)—get, and I always hate to see our great state fall in rankings below others we’d like to top. The latest one that caught my eye is the abysmal placement of Texas and its largest metro areas in the area of credit scores, the system used by lenders and others to evaluate risk. Does it surprise you to know that Texas is dead last? Or that Houston and Dallas-Fort Worth garnered spots number 19 and 20 of the cities analyzed? (There were 20.) Given that the economy of the Lone Star State has been generally growing faster than other areas, you would think we could do a little better.
The people doing the study, Experian, looked at millions of credit scores from people across the US and computed metro area and statewide averages. I guess there’s something to the stereotype of New Englanders being close with their money, because that’s the region that ranked highest. Interestingly, though, the region also has the highest level of debt (excluding real estate). The West South Central region (Texas, Oklahoma, Louisiana, and Arkansas) has the lowest average index rating, well below much of the rest of the country.
Should we be alarmed by this? Yes and no. “Yes” because it’s a clear indication that Texans aren’t managing credit as well as those in other areas (at least in the way lenders look at it) and will be faced with higher interest charges in the future. (I’ve touched on the importance of credit information in this space in the past.) However, to the “no” part of the answer, credit scores are only one piece of information in a list of items used by lenders in evaluating applications. Moreover, they deal solely with the past.
Credit scores are not what many people think they are. Under one widely used model, the largest determinant of your score is your payment history for various accounts, including the number overdue and those paid as agreed. Also important are the amounts owed and their relationship to the total credit you have available. The length of time since accounts were opened is considered, as are the number of recently opened accounts. Inquiries play a small role.
This leaves out many variables integral to the ability to repay debt, such as salary and occupation. In addition, age is not considered. No matter how well a twentysomething is managing his/her money and regardless of his/her likely future income stream, a score at the top of the rating chart is improbable. Texas’ relatively young population tends to pull down our average.
In looking at the data further, it became apparent that a key drag on Texas’ ranking is a relatively high number of late payments. Like bankruptcies, however, this is often a lagging indicator of previous financial trouble rather than a portent of things to come. Even so, it’s clear that an abundance of people with poor credit ratings is not a good thing for an economy.
For individuals with poor credit ratings, the consequences go beyond increased difficulty in borrowing. Lenders consider credit scores (and other information such as income) in deciding whether to extend a loan. They also use creditworthiness in determining the interest rate that will be charged. Lowest rates are often offered to potential customers with scores above certain plateaus. If you meet the criteria, you could save tens of thousands on mortgage interest, for example, if the bank offers you a half-point better deal.
Improving a credit score takes time, but it can be done. Making payments on time, keeping down outstanding credit card balances as a percentage of your total available credit, and other actions can make a difference. There are many reputable people out there who can help.
From the perspective of an economist, the fact that Texas ranks last among all states is clearly not good news. It points to potential future problems with consumer spending and greater leakage from the economy in the form of higher interest payments. However, it’s important to remember that credit scores are another lagging indicator. As the economy improves and incomes continue to rise, I think we can expect our ratings to begin inching up. I just wish we didn’t have so far to go.