'Perfect storm,' sinking credit scores jeopardize recovery

As the U.S. economy struggles with bankruptcies, unemployment, foreclosures, repossessions, and declining housing values, the perfect storm scenario just got more intense. New data released last week reveal that average credit scores have fallen to new lows, jeopardizing economic recovery efforts (CNBC.com July 12).

Figures from FICO Inc., a provider of credit scores, paint a bleak picture. Nearly 43.4 million Americans - slightly more than a quarter of the 170 million consumers with active credit accounts - have a credit score below 600 (Associated Press July 12). In comparison, that level historically has been about 15%.

Most lenders consider individuals with low credit scores a high risk for loans, mortgages, and credit cards, and - if the consumers are approved for credit - it's at a higher cost. But tighter lending standards by banks restrict access to credit and are one reason for the slow economic recovery.

The trends are concerning:

• Location, location, location: Regions hit hardest by the housing crisis and declining home values - including Southern California, Arizona, Nevada, and others - experienced the biggest downward shift in credit scores.
• Subprime on the rise: Roughly 35% of consumers with credit histories have a credit score of less than 650, considered subprime or even nonprime.
• Middle tier declining: Consumers with credit scores between 650 and 699 - considered moderate credit risk - make up 11.9% of scores, reflecting a drop of about 5.3 million people from the historical average of 15%. These individuals are more likely to try to borrow than those in the subprime range but find it harder to qualify for affordable loans.

One positive trend to note: Individuals with a top score of 800 or higher increased in the past few years, likely because they cut spending and paid down debt. But as more homeowners face the prospect of losing their homes, one foreclosure can cut 150 points off the credit score (USA Today July 12).

A "good" credit score is generally 780 and higher. Know what affects your credit score so you can take steps to improve it. Your bill payment history makes up a whopping 35% of your score, so pay all bills on time. Other factors include amounts owed to creditors (30%), length of credit history (15%), new credit, or increased debt obligations (10%), and a healthy mix of credit (10%). Consider paying bills online or setting up autopay for bills to be paid directly from your checking account to assure timely payment.

For more information about credit scores, visit myfico.com.