Here’s How
Perhaps the best way to answer your question is with this image:
While the median remains the same in both images, the average does change and the difference between the two increases.
Now imagine that the balls are simply credit scores…
As some balls (people with low credit score) move left (i.e. their credit score drops), it drags down the average credit score but doesn’t affect the median credit score.
Prefer a numeric example? Consider these two lists of 1,200 Fico scores:
Number Of People |
Fico Score |
|
Number Of People |
Fico Score |
30 |
800 |
|
30 |
800 |
60 |
780 |
|
60 |
780 |
110 |
760 |
|
110 |
760 |
150 |
740 |
|
150 |
740 |
250 |
730 |
|
250 |
730 |
120 |
720 |
|
120 |
720 |
80 |
700 |
|
80 |
680 |
80 |
680 |
|
80 |
660 |
70 |
650 |
|
70 |
630 |
60 |
600 |
|
60 |
580 |
50 |
550 |
|
50 |
530 |
40 |
500 |
|
40 |
480 |
40 |
450 |
|
40 |
430 |
30 |
400 |
|
30 |
380 |
30 |
350 |
|
30 |
350 |
Average – 678 Median – 725 |
|
Average – 671 Median – 725 |
On the right hand side table, the people with bad credit lost on average 20 points compared to the people on the left hand side table, while the people with relatively good credit score retained their score.
The result: while the average credit score on the right hand side table is lower by 7 points than that of the left hand side (671 compared to 678), the median credit score for both tables is the same – 725.
Why is that so?
Because of the current credit crunch, more people than before find themselves in a situation where they can’t handle their financial obligations. When these people increase their credit utilization, start missing payments, don’t pay their utility bills or even default on their credit card – their credit score takes a biting and drops immediately.
On the other side of the scale, people who keep their financial obligations don’t see significant change in their credit score.
The result – the average credit score drops, while the median credit score remain unchanged!
What does this mean?
This example demonstrates why the average credit score is a bad reference. If your credit score remain the same while the average credit score dropped – that doesn’t make your credit standing better!
Hope this answers your question.