The journal reports that according to data complied by Deutsche Bank 25% of Americans have a FICO credit score of less than 600, which is considered a low credit score by lenders, employers and more financial institutions. The standard FICO credit score range is between 300 and 850, and a good score is one above 750.
The recession which spurred a housing crash and credit crunch for many consumers and small business owners is the primary cause of a 10% drop in the average FICO score over the last three years. The credit worthiness of people in an economy where credit plays a central role presents a significant obstacle to any sustained recovery through an increase in consumer spending.
Over the past couple years, millions of Americans have reneged on their debts — because they lost their jobs, because they took on more than they could handle, or both. For many, those defaults have brought immediate financial relief, leaving more cash to spend on other things. Now, though, they’ll also have to face the challenge of living with bad credit.
The main upshot is that, given the disappearance of sub prime lending, one in four Americans won’t be able to borrow money to make a major purchase in the foreseeable future. Some may be able to get mortgage loans through government programs, which allow for credit scores as low as 580. But none will qualify for loans guaranteed by Fannie Mae or Freddie Mac, which account for the lion’s share of the market and typically require credit scores of at least 650. Getting auto loans or credit cards will also be tough.
Understanding and Improving your FICO Credit score
The good news is that no matter what your score you can always do things to improve it. Some may seem counter-intuitive, but they are all looked upon favorably by the rating agencies:
Check the credit reports that you get with your FICO score for errors, omissions and potential identity theft. Omissions matter because you want to show that you have paid off loans. If you notice information that’s inaccurate, you can submit a request for removal by mail or online with the major rating agencies. Be sure to specify what information you think is inaccurate and why, and include any documents that support your argument. Ask in writing that the information be corrected or removed from your report. By law, the bureaus must investigate your complaint, usually within 30 days, and give you a response in writing (or via e-mail, if your request was made online) and a free copy of your report, if the information is changed as a result. Your score should reflect that change shortly after.
Paying your bills on time is crucial. Since 35% of your score is based on your payment history, delinquent payments and collections can have a severe impact on your score. If you can’t pay off your credit card debt every month, pay it down to less than half the maximum available balance. The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO score fades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you’re managing your credit well.
A quick and effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score. So don’t cancel the credit card once you’ve paid it off because the score considers longevity and available (revolving) credit.
- If you have missed payments, get current and stay current. The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO scorefades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you’re managing your credit well.
A common mistake for many frugal and debt averse individuals is never using a credit card. Advisers recommend that they use it even just once a year and pay it off immediately.
The FICO credit score can be hurt if multiple lenders request a person’s credit report because they’re shopping for a mortgage or auto loan. To avoid this, get “good faith” estimates from banks without giving your Social Security number.
- Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your FICO score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO score.