According to an Associated Press article, more Americans have had their credit scores slip below the 600 mark and into the "poor risk" category.
The AP, citing data provided by Fair Isaac Corporation (FICO), reports that about 25.5 percent of consumbers -- more than 43 million people -- had credit scores of 599 or below at the end of April. That means they are unlikely to be approved for credit cards, car loans or mortgages under banks' tighter lending guidelines.
Historically, only about 15 percent of the 170 million people with active credit accounts have scores at 599 or below. So the 10-percent dip in that figure over the past two years is significant. What's troubling is that the figure impacts us all.
Consumer borrowing, though it ultimately played a major role in the financial crisis in the U.S., fuels the economy. The fact that one in every four Americans can't get a home or car loan -- or even that Target credit card -- HAS to be keeping the economic recovery in slow gear. People spend when they can borrow, and borrow when they can spend.
Interestingly enough, FICO also reports that people at the other end of the spectrum -- a score of 800 or better -- also number higher than the historcial norm. About 17.9 percent of consumers are among this group, up from the traditionally average of about 13 percent. This might be a result of those who are able paying down their debts while not borrowing more. This would help bump credit scores, but it doesn't necessarily help the economy.
The worst news might be that Amercians with moderate credit scores -- 650 to 699 -- are dropping in numbers, too. Those folks make up 11.9 percent of consumers, which is down from the norm of about 15 percent. This is the group that is probably most impacted by tighter lending standards, which in turn could affect the overall economy as much or more than the group at 599 or below.
The reason is because those with scores of 599 or below are less likely to attempt to borrow money than the group in the 650-699 range. It's the people in the latter category that probably spur the most consumer spending. If a guy with a 699 score today has a car loan that costs one or two more percentage points in interest, he is less likely to be able to afford the car.
Everybody is quick to hail the end of the "sub-prime" mortgage, but I can tell you for certain that there are people out there who have tried to buy homes and can't qualify now. And they are people who, a couple of years ago, would have qualified for a "prime" loan.
The stabilization of home prices and a drop in the unemployment numbers are often cited as keys to speeding up economic recovery, and we might not see a true recovery until we see dramatic improvement in those areas. But this new information on credit scores is something to consider, too.
In case you haven't noticed, Wall Street has been trending consumer confidence surveys recently. When consumer confidences jumps or drops, the market has responded. That's probably because investors understand that the duration of this recovery period is going to be affected by consumers' ability or willingness to spend.
What's ironic is that the easy-money lending practices that stuck so many banks with bad loans have gone so far the other way. Too much borrowing helped get us into this mess, and now too LITTLE borrowing is helping to keep us there.
The good news is that for those with strong credit scores, there is plenty of opportunity to borrow money at almost unbelievably low rates. Buying a home or a car, or putting that large remodeling job on a home equity line of credit -- typical things for which money is borrowed -- is possibly cheaper now than any other point in our lifetimes. And it's quite possibly cheaper than we will ever see again.
This is why it's important to keep that score up. It's much better to be part of the three out of four who CAN borrow than one of the four who now can't.
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