As the recession drags on, more people find their all-important credit scores slipping. Here's why - and what you can do about it.
Americans' credit scores, the three-digit number that determines whether you'll get a loan and how much you'll pay for it, have taken a beating.
Millions of consumers' scores have dropped, making it more expensive for them to borrow money -- or even impossible if the score has sunk low enough.
"You have to watch out for a vicious circle. Now you have a bad credit history, which makes it harder for you to recover," said Evan Hendricks, a Washington-based expert and author on credit reports and scores.
The falling credit scores are a reflection of the times: plummeting home values, record foreclosures and the overall recession. At the same time, lenders are applying stricter standards to borrowers, including requiring higher credit scores.
"For better or worse, our economy is very dependent on consumer spending," Hendricks said. "If tougher standards mean that people with good credit can't get credit ... that could choke off the recovery or slow it down."
Most Americans may not know their actual credit score, but they've seen enough marketing by the credit-score companies, including Minneapolis-based Fair Isaac Corp., to know that the number, which can range from 300 to a perfect 850, has become a de facto national ID. Lenders rely on Fair Isaac's FICO score, but so do employers when screening job candidates, insurers when issuing policies for homes and autos, and landlords when renting an apartment.
Drags on your score
And exactly what many people are experiencing now -- foreclosures, late credit-card payments -- will bring down their credit scores.
Americans carry $2.56 trillion in consumer debt, up 22 percent just since 2000, according to the Federal Reserve. The average household's credit-card debt is $8,565, up almost 15 percent from 2000. And a report out last month said borrowers with good credit now make up the largest share of foreclosures.
"There's no question a foreclosure can really slam your score," Hendricks said. "It will easily send you into subprime territory."
Overall, he said, two major factors are bringing down credit scores: late payments because of the economy and credit-card companies reducing credit limits, meaning people are using a greater percentage of their available credit.
Walking away from a house takes a toll on a foreclosed homeowner's credit. But so do late payments -- in particular those that are more than 90 days overdue. According to Fair Isaac, which created automatic credit scoring, bankruptcy, credit card defaults and foreclosures stay on a person's credit report for seven years. That said, a single bad account such as a foreclosure would be better than a bankruptcy, which usually involves many defaulted accounts. But if all other bills remain current, Fair Isaac says a foreclosed homeowner's score could begin to rebound in as little as two years.
Fair Isaac shies away from devising a rating system of what ranges are "good" and which are "bad," saying each lender has its own standard. In general, a score of 700 or better is a sign the consumer handles credit well. Most lenders say a score of 650 or below indicates a high credit risk that could mean higher interest rates or a tougher time getting credit. Information for the score is based on that person's credit report.
The top 25 auto lenders and credit-card issuers use some version of the FICO score to make lending decisions, as do 90 of the top 100 U.S. financial institutions. It's common for mortgage originators to pull credit scores from all three major credit bureaus and average them to help determine a consumer's interest rate.
Credit report is free
For consumers, getting your credit report is easy -- and free if you go to the right spot -- but getting your score can be more complicated.
The three credit bureaus, Experian, Equifax and TransUnion, sell reports and scores to lenders and consumers. Also, Fair Isaac sells the bureaus' FICO scores directly to consumers via myfico.com.
Fair Isaac spokesman Craig Watts estimated that the three credit bureaus sell "well over 10 billion" FICO scores each year to businesses.
Asked whether Equifax has seen an increase in consumers seeking credit information, company spokeswoman Demitra Wilson said, "Definitely, especially right now. People are very concerned about their scores. It's the economic environment, the tightening credit market. People are very concerned about how their credit behavior impacts their financial well-being."
Under the Fair and Accurate Credit Transactions Act (FACT), consumers can get one free credit report a year from each of the three big credit bureaus. Consumer advocates warn of the many companies that have sprung up that charge consumers for information they can get for free.
Consumers who want their credit score will need to pay a small fee -- generally about $15.
Consumer advocates recommend checking your report periodically. If you see inaccurate information on your report, inform the credit reporting company. Those companies must investigate and will generally do so within 30 days.
While Watts said millions have seen their scores drop, a "like" number of savvy consumers have seen their scores go up because they paid off balances and put off big purchases when the economy started to spiral down.
In good times, he said, the distribution is shaped like a bell curve. During a recession, it retains that shape but flattens out. "You have fewer people in the middle ... and more people at both ends," he said.
Watts said the best advice he can offer to consumers is this: "Don't get too excited about the nuances in credit scores."
There are no "quick fixes" to repair a bad score.
"The same general rules apply today that have applied for the last 20 years," Watts said. "Pay your bills on time, keep balances low relative to the limit and take on new credit only ... when needed. Those consumer habits are going to steer you in the right direction."
Staff writer Kara McGuire contributed to this report. Suzanne Ziegler • 612-673-1707