In­creas­ing num­ber of Amer­i­cans have poor credit scores

Austin American-Statesman - - BUSINESS - By Eileen aJ con­nelly

NEW YORK — The credit scores of mil­lions more Amer­i­cans are sink­ing to new lows.

Fig­ures pro­vided by FICO Inc. show that 25.5 per­cent of con­sumers — nearly 43.4 mil­lion peo­ple — now have a credit score of 599 or be­low, mark­ing them as poor risks for len­ders. It’s un­likely they will be able to get credit cards, auto loans or mort­gages un­der the tighter lend­ing stan­dards banks now use.

Be­cause con­sumers re­lied so heav­ily on debt to fuel their spend­ing in re­cent years, their re­stricted ac­cess to credit is one rea­son for the slow eco­nomic re­cov­ery.

“I don’t get paid for loan ap­pli­ca­tions, I get paid for closings,” said Ritch Work­man, a Mel­bourne, Fla., mort­gage bro­ker. “I have plenty of busi­ness, but I’m strug­gling to stay open.”

FICO’s lat­est anal­y­sis is based on con­sumer credit re­ports as of April. Its find­ings rep­re­sent an in­crease of about 2.4 mil­lion peo­ple in the low­est credit score cat­e­gories in the past two years. Be­fore the re­ces­sion, scores on FICO’s 300-to-850 scale weren’t as volatile, said An­drew Jen­nings, chief re­search of­fi­cer for FICO in Minneapolis. His­tor­i­cally, just 15

Con­tin­ued from B per­cent of the 170 mil­lion con­sumers with ac­tive credit ac­counts, or 25.5 mil­lion peo­ple, fell be­low 599, ac­cord­ing to data posted on

More are likely to join their ranks. It can take months be­fore pay­ment mis­steps ac­tu­ally drive down a credit score. The La­bor Depart­ment says about 26 mil­lion peo­ple are out of work or un­der­em­ployed, and mil­lions more face fore­clo­sure, which alone can chop 150 points off a score. Once the dam­age is done, it could be years be­fore those in this group can re­store their scores, even if they had strong credit his­to­ries in the past.

On the pos­i­tive side, the num­ber of con­sumers who have a top score of 800 or above has in­creased in re­cent years. At least in part, this re­flects that more in­di­vid­u­als have cut spend­ing and paid down debt in re­sponse to the re­ces­sion. Their ranks now stand at 17.9 per­cent, which is no­tably above the his­tor­i­cal av­er­age of 13 per­cent, though down from 18.7 per­cent in April 2008 be­fore the mar­ket melt­down.

There’s also been a no­table shift in the im­por­tant range of peo­ple with mod­er­ate credit, those with scores be­tween 650 and 699. The new data show that this group com­prised 11.9 per­cent of scores. This is down only marginally from 12 per­cent in 2008 but re­flects a drop of roughly 5.3 mil­lion peo­ple from its his­tor­i­cal av­er­age of 15 per­cent.

This group is sig­nif­i­cant be­cause it might feel the ef­fects of len­ders’ tighter credit stan­dards the most, said FICO’s Jen­nings. Con­sumers on the low­est end of the scale are less likely to try to bor­row. How­ever, peo­ple with midrange scores that had been el­i­gi­ble for credit be­fore the melt­down are look­ing to buy homes or cars but find­ing it hard to qual­ify for af­ford­able loans.

Work­man said he has seen this first­hand. A cus­tomer with a score of 679 re­cently walked away from buy­ing a house be­cause he could not get the best in­ter­est rate on a $100,000 mort­gage. Had his score been 680, the rate he was of­fered would have been a half-per­cent lower. The dif­fer­ence was only about $31 per month, but over a 30-year mort­gage would have added up to more than $11,000.

“There was noth­ing deroga­tory on his credit re­port,” Work­man said of the cus­tomer. He had, how­ever, re­cently ob­tained an auto loan, which likely low­ered his score.

Stud­ies have shown FICO scores are gen­er­ally re­li­able pre­dic­tions of con­sumer pay­ment be­hav­ior, but Work­man’s ex­pe­ri­ence points to one draw­back of credit scor­ing: The au­to­mated un­der­writ­ing pro­grams len­ders use can’t al­ways dif­fer­en­ti­ate be­tween two peo­ple with the same score. An­other con­sumer might have a 679 score be­cause of sev­eral late pay­ments, which could in­di­cate he or she is a big­ger re­pay­ment risk. But a com­puter pro­gram that de­pends just on score won’t con­sider those de­tails.

On a broader scale, some of the spike in fore­clo­sures came about be­cause home­own­ers were fi­nan­cially ir­re­spon­si­ble, while oth­ers lost their jobs and could no longer pay their mort­gages. Both rea­sons have the same ef­fect on a bor­rower’s FICO score.

In the past, too much credit was handed out based on scores alone, with­out con­sid­er­ing how much debt con­sumers could pay back, said Ed­mund Tribue, a se­nior vice pres­i­dent in the credit risk prac­tice at MasterCard Ad­vi­sors. Now the abil­ity to re­pay the debt is a crit­i­cal part of the lend­ing de­ci­sion.

Work­man still thinks credit scores play too big a role. “The pen­du­lum has swung too far,” he said. “We ab­so­lutely swung way too far in the lib­eral lend­ing, but did we have to swing so far back the other way?”

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