Dallas, Texas has consistently shown to have the lowest average credit score out of the largest 20 metro areas in the United States. The most recent survey from this year shows we have an average score of 669. And Texas has the lowest average credit score of any state in the nation. This is hardly late-breaking news. I've monitored this for the last few years, and we're consistently at the bottom of the list for both cities and states (Houston is a very close second to Dallas in the city rankings). This fact is perplexing to many people, especially since the cost of living is so inexpensive here. We have cheap gas. Our homes are modestly priced and in-line with our median incomes. It doesn't take a doctor's salary to live fairly well here. But for some reason (or reasons), we can't seem to keep our credit scores from lagging behind the rest of the country. We're a full 55 points behind the current leader, which is Minneapolis. And California? As a state, we're 22 points behind them. California? The king of high cost living? How can that be?
I believe part of the answer lies in the fundamentals of how our real estate market works compared to others around the country. First of all, Texas has some of the most conservative home equity laws in the country. In fact, home equity loans on primary residences for purposes other than home improvement weren't even LEGAL in Texas until 1998. California, on the other hand, has very lax home equity laws, as do many other states around the country. Some states allowed homeowners to cash out up to 125% of the equity of their homes (although no lenders that i'm aware of are still offering those programs today).
Let's picture two hypothetical individuals. Bob, who lives in California, and Jim, who lives in Texas. Let's assume both of them bought modest homes (for their respective salaries) in 2000. Let's also assume that both of them incurred $50K in credit card debt between 2000 and 2006. And in mid 2006, they both realized at the exact same time they had to take action to eliminate this debt burden. What choices did they have?
Very different ones....
Bob was lucky. Since he's from California, the value of his home rose by $80K from 2000 to 2006. Bob also had the luxury of cashing out up to 100% of the equity in his home to consolidate those high interest credit cards into a new mortgage, which saved him hundreds of dollars per month and allowed him a higher mortgage interest deduction on his taxes. And since his value went up by $80K and he only needed $50K to pay off his credit cards, Bob decided to increase his mortgage amount by the full $80K and use the extra $30K to pay off his car. What a good deal for Bob.
Jim, on the other hand, found himself between a rock and a hard place. His home only appreciated by $10K during that same time period, and Texas restricts home equity loans to 80% of the value on his primary residence. Since he purchased his home with 100% financing, his only option to access that equity would have been to sell the house. And since the cost to sell would probably have burned up the entire $10K in equity, he quickly realized that was not an option. Jim also did not save money or participate in his company's 401K, so he found himself basically bankrupt. And as a result, Jim's credit score tanked.
BUT there's a flipside to this story. Chances are, Bob is now upside down on his home. He may still be making his mortgage payments on time (if he was lucky enough to keep himself from falling back into the trap of high interest credit card debt), but his home may be worth $80K LESS than it was in 2006. Jim, on the other hand, may actually be sitting on slightly more equity then he was in 2006. If Jim was lucky enough to find a way to pay off his $50K in credit card debt, his credit and financial life might be back on track already.
So that's one theory as to why Texans have the lowest average credit scores. We simply do not have the luxury of using our home equity as a low interest ATM machine to refinance high interest debt. And if you ask me, this is a good thing overall. I suspect that values may have increased to an unsustainable level if the home equity laws were more liberal here.
Over the last few years, I've had the opportunity to help many clients that relocated to Texas from California and some other high cost states. IF they managed to sell at just the right time, most came out way ahead. Most were able to pay off all of their bills and still walk away with an impressive nest egg that was completely tax free if they happened to own their home long enough to escape the capital gains burden. Many homeowners are now upside down on their homes after many years of rapid appreciation. In many cases, these homeowners used that equity as a virtual ATM machine to refinance high interest debt, which enabled many of them to live far above their means. This has come to a screeching halt in the last year, and I suspect that credit scores, on average, will deteriorate in many parts of the country where this practice was prevalent.
But what about the Northern states? If you looked at the average credit scores by state, i'm sure you couldn't help but notice that our neighbors to the north seem to have higher credit scores than most of the states in the deep south. I think this might be the result of our warmer climate more than any specific fundamentals in the economy. The South seems to be bustling with outdoor activity year-round, and spending more time outside of the home encourages higher spending. I've been up North a few times in the winter, and I didn't see many people out socializing at bars, restaurants and shopping malls when the wind chill was minus 20! But it's not uncommon to have difficulty finding a tee time at a golf course in Texas in the winter, where temps can get into the 70's during one of our many mild streaks of weather. The cold never seems to last long here, and we Texans don't like to stay indoors when the weather is nice!
Again, just a theory, but it makes sense to me.