While there are some signs that the economy may be turning around, the state of America’s credit scores suggests that we have a long way to go. Unemployment rates remain pretty high, and while the credit market is loosening up there isn’t too much evidence to suggest that consumers have changed their spending habits, at least when it comes to the question of being truly responsible with their funds and their credit.
According to a new report released by FICO – which is the company that originally designed the formula that is most often used by credit reporting agencies to computer your consumer credit score – the average credit scores in the country have dropped to a new low. This suggests that the ability of consumers to get loans and good rates on home and auto loans, as well as to get revolving credit such as credit cards, may be dropping even more.
The recent report suggests that more than a quarter of all Americans now have a credit score that is below 600. The credit score is usually a number between 300 and 850, and represents the individual’s credit worthiness. A credit score below 600 is usually considered bad credit.
One of the reasons for those falling credit scores certainly has to do with the way that American consumers relied so heavily on credit prior to the economic collapse. After the subprime mortgage crisis, followed by the employment crisis, a great number of American consumers found themselves unable to meet even their most basic financial obligations, let alone pay on their credit. Many mortgages went into default, as did auto loans and other types of credit. This started a dangerous cycle of credit card debt, today which is causing credit scores to plummet even further.
If the study is correct, more people are likely to find their credit scores dropping in the future. It can actually take several months, in some cases, before missed payments actually impact your credit score. As more and more Americans look at foreclosure and unemployment, those average scores are going to decline more and more.
Photo via David Paul Ohmer