Lower credit scores and tighter lending standards become the norm

a screen shot of fico.com showing a credit score

A FICO report shows a record number of people in the lowest credit score categories, and tighter lending standards make short-term credit alternatives a lifeline for millions of consumers. Flickr photo.

Credit scores are falling to new lows for millions of Americans. Lower credit scores and tighter lending standards have economic recovery caught between a rock and a hard place. Figures provided by FICO Inc. show that 25.5 percent of consumers — about 43 million people — now have a credit score of 599 or below. These consumers probably won’t be able to get the affordable mortgages, auto loans and credit cards that economic recovery is depending on.

Millions fall into lowest credit score categories

Along with a high unemployment rate and depressed home prices, plunging credit scores seem to be canceling out what should be positive things like record low mortgage rates and no-interest auto loans. The Associated Press reports that FICO’s findings show an additional 2.4 million people fell into the lowest credit score categories during the Great Recession. Historically, just 15 percent of 170 million consumers with active credit accounts, or 25.5 million people, fell below 599. Borrowing for these consumers is often limited to short term credit alternatives such as installment loans, personal loans and payday cash advances.

A lifeline for people with low credit scores

Already at record lows, the number of consumers with credit scores below 599 is expected to increase. The Associated Press article indicates that it can take several months before missed payments drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed. Millions more face mortgage foreclosure, which can delete 150 points from a credit score. Once the damage is done, it could be years before this group can restore their credit scores, even with a strong short-term credit history. Fortunately, with access to short term credit alternatives, they won’t be completely left out in the cold.

Lending standards lowering credit scores

Leave it to banks to do their part to lower credit scores. Creditcards.com reports that by cutting credit lines and increasing interest rates, banks are lowering their customers’ credit scores. This happens because FICO scores compare debt levels to credit limits. Lower credit lines make it look like a borrower is closer to being maxed out when they haven’t increased their debt at all. Plus, higher interest rates make it tougher to pay off existing debts. And for a personal loan to help pay the bills, they can forget about talking to their bank.

Can the  economy recover without easy credit?

Consumer spending based on credit fueled an unsustainable U.S. economic boom that was destined to bust. Considering the latest FICO report on record low credit scores, it’s no wonder a U.S. economic recovery is stuck in neutral, according to the Dallas News. consumers who can’t borrow money can’t buy houses and cars, invest in home improvements, or make other major purchases that drive economic growth and give businesses reasons to hire workers and ramp up production. For credit scores to improve, the economy has to recover and Americans have to change their spending habits. For an economy driven by consumer spending, that will be an amazing feat indeed.

Other recent posts by bryanh