More Americans with low credit scores face tougher prospects for finding jobs, getting loans and participating in U.S. economic recovery. Franco Folini/Flickr photo.
Credit plays a central role in the U.S. economy. Economic recovery and the credit scores for a big chunk of the U.S. population are mired in the same pit of quicksand. Millions of Americans have reneged on their debts in the past couple of years. Some who lost their jobs had no choice. Others, like strategic mortgage defaulters, walked away rather than losing more money even though they could pay. Either way, these people face the challenge of living with bad credit. After the immediate relief of defaulting on debt, a long-term financial obstacle course lies ahead for them. And U.S. economic recovery will have to limp along without their help.
More people have low credit scores
In the past few years the recession has rendered millions of Americans no longer able to qualify for a mortgage, a car loan or a credit card. The Christian Science Monitor reports that in normal times, about 15 percent of consumers fall into the poor credit category with a FICO score under 600. In April, that figure stood at 25.5 percent, according to a recent FICO report. The continuing high rate of foreclosures and unemployment and a looming second dip in housing prices suggest the credit picture could worsen before it improves.
Low credit scores left out of lending
With 25 percent of Americans with credit scores below 600, one in four won’t be able to borrow money for a major purchase for quite a while. The Wall Street Journal reports that some may be able to get mortgage loans through Federal Housing Administration 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.
Job credit checks increasing
For people who reneged on their debts because they lost their jobs, finding a new job will be tougher with a low credit score. CNN reports that an increasing number of employers are using credit checks to screen potential job applicants. Missed payments on a mortgage, car loan or credit card could keep them from getting hired. According to a survey by the Society for Human Resource Management, 60 percent of employers are using job credit checks when filling at least some of their openings. Only 35 percent reported checking credit in a 2003 survey, and only about 13 percent did so 1996.
Rebuilding a credit score can take years
Millions of cash-strapped Americans have gotten immediate financial relief from defaulting on debt. But people thinking about following suit should know that the short term gain will have long-term consequences. The Journal article said that rebuilding a credit rating can take anywhere from three to seven years. Bad credit brought on by the recession will make it more difficult for many Americans to work their way out of it.
I'd like to correct an error in your story. Credit scores are neither developed nor sold for employment reporting purposes. Therefore, a credit score has no impact on hiring decisions.
Employers do use credit reports for employment. The SHRM data indicates how many companies utilize credit reports. To complete the story, only about 15% of all background checks for employment actually contain credit report data. So even though 60% of companies use credit reports for employment, they only pull a report for 15% of all applicants.