25 Percent Of American Consumers Now Have Low Credit Scores

Before the recession hit, roughly 15% of Americans had FICO credit scores below 600. But after the past couple of years of late payments, defaults, and foreclosures, that number has grown to 25%, or about 43 million people. At the same time, the number of people with excellent scores (800 to 850) has increased nearly 5% from pre-recession average, which the Associated Press says is partly a result of people cutting spending and working to pay off loans more quickly.

“More Americans’ credit scores sink to new lows” [Associated Press]

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  1. pecan 3.14159265 says:

    So basically, bad credit scores went up 10% and good credit scores went up 5%. I’m going to be positive and just call it a silver lining to a cloud of bad credit.

    • Loias supports harsher punishments against corporations says:

      Or the cup half empty persepctive is that there is an increased divide between those with good credit and those with bad credit. That anecdotally equates to a deeper divide between the rich and the poor.

  2. MakingAMillionDollars says:

    This is just another great example of the rewards of living within your means or being frugal should I say. The funny thing is that the people with excellent credit ratings normally don’t need it because they have no debt and in turn is why they have the high FICO scores. The people with poor credit scores are the ones that usually are up to their ears in debt and just one emergency sends them running to apply for more credit and to get into more debt. Getting your monthly expenses way lower than your income is the only way out. Earning more through creative ideas is the other way to increase income while decreasing spending. We can all do it!

    • qwickone says:

      I thought a high score is from having a reasonable amount of debt , not $0 debt. My personal observation is that it has little to do with the amount of debt, but rather if you’re servicing your debt, as agreed. When I added my mortgage (renting previously, so this increased my debt by about 25x), my credit score dropped about 30 point. After a year, I’m up over 100 points (all payments on-time, of course).

      • Loias supports harsher punishments against corporations says:

        it’s both – having no debt is worse than debt managed well, from a FICO perspective. But it’s not a huge dip to have no debt to record. You just won’t get 800+ scores.

        • qwickone says:

          Yeah, I finally got it over 800 when I added and starting paying my mortgage. I had been in the mid-700s for a couple years before that without much movement.

      • Nigerian prince looking for business partner says:

        From my own experience and from reading the tips over at myfico.com, one way to add 10-20 points to your FICO score is to have a small amount of revolving debt. According to the site, the goal is to have more than 0% and less than 10% of utilized revolving debt (credit cards).

        But these kind of tweaks wont build up a strong FICO on their own. Ultimately, the goal is to have few/no derogatory information on a credit report, have a long and diverse credit history, low utilization and few recently opened accounts.

    • Beeker26 says:

      Unfortunately, as is becoming all too common in our society, you eventually meet a dead point, where your expenses can’t get any lower and your income can’t get any higher, and you’re basically stuck forever in debt, not because you’re buying fancy cars, computers, iPhones, etc., but because you’re just trying to pay your rent (which keeps going up), put food on the table (which keeps going up), and clothes on your kid’s backs (which keeps going up), while your income stays stagnant or goes down.

      So yeah, keep drinking your Kool-Aid, Polly. Out of touch with reality much?

      • frank64 says:

        The problem is there are at least two realities and his is as valid as yours. Both things happen. What I mostly saw was high consumerism like he says. I know there are people not doing well through no fault of their own in today environment too.

        I have been unemployed for 1 1/2 years and one reason I am surviving is I had a good basic financial plan. My car was paid for and my expenses low. Now many who got laid off at the same time are in deeper trouble, and I am sure you would say “through no fault of their own” but the truth is the consumerism put them in a much weaker position.

        • Beeker26 says:

          I’m curious tho, what’s gonna happen when your unemployment gets cut off and your savings runs out? Then what?

          • frank64 says:

            Well, my point was I was much stronger than what how I would normally be if I didn’t do this. It of course doesn’t mean I am immune to any problems. To say that I am not totally immune does not mean I should have gone the other way and embraced the consumerism I talked about. It is like pointing out the person who doesn’t smoke and gets lung cancer means that people should smoke.

            I actually received a grant to go to school, the grant only pays for the education, so my expenses of travel and other incidentals I need to pay for. I just received the grant in January, so it was not the reason I serviced like I did. However having a little saved is what has allowed me to pay for car repairs and pay for these expenses. I may even be better off than if I was not unemployed, and it was only being financially strong that enabled me to pursue this.

            • frank64 says:

              serviced=survived. And when I say I may be better off, I mean AFTER the degree. Right now of course not better off.

    • A.Mercer says:

      I started this same philosophy 6 years ago. I stopped trying to live by a budget that accounted for every penny. I started living by trying to maximize the money left over at the end of the month. Reduce bills. I cancelled unnecessary services, I started cooking more, I started paying attention to my spending. Reduce debt. I paid off my student load, I pay off my credit card every month, I do not take out any more credit (except for my recent house purchase). Increase pay. I found a better job that not only makes better use of my skills but also increases my skills so my chances of finding another job increases.

      My life dramatically changed since I started aiming for reducing bills and increasing earnings. I started reading a lot more about personal finance. In fact, it was this reading and research that led me to the Consumerist.

  3. twophrasebark says:

    Best thing ever would be if everyone just went bankrupt.

    The entire “living beyond our means” idea isn’t working. Except for college, cars and homes, we just should stop lending money so we can all have the things we want but can’t afford.

    Wasn’t there a time when people just made do with what they have? What’s wrong with that?

    • ChuckECheese says:

      The problem with “that,” is that the basics are far more numerous, and more expensive, than they used to be.
      Read the book “The Two-Income Trap,” which explains the galloping increases in the costs of housing, insurance, medical care, education, etc., and how wages have not kept up at all.

      • frank64 says:

        I haven’t read the book, so I am going off half cocked here, but at least a contributing factor is not that the wages haven’t kept up per se, it is more that some things have risen much more than they should have. It is not the wages fault we paid much more for houses than we could afford. Requiring wages to rise to pay for this increase would have been backwards and have made thing worse.

        The housing industry, the political industry, and more than anything us consumers decided that homes were worth a bigger percentage of our income. In order to accommodate us we were given ways to be able to afford to pay more and more. We were also told, that if we think prices are hi now, we better hurry up and buy, because they are going up. We were also told that we should have an SUV every few years and computer, cable TV and $80 cell phones, and broadband. We are asking our wages to keep up with our rising entitlement, when we should have been asking what we can afford with our wages.

        We were enabled by many different groups, but we as consumers made these decisions.

        • frank64 says:

          The same thing could be said for education to a degree. It rose higher than it should have in some part due to the loans and grants available. Rising at a much faster rate than wages does not show a problem with wages, it shows a problem with the cost of education. As for health care, there is no way wages can be expected to keep up with it, for one thing new technology and for another an open check book for the whole industry because of the insurance system. We had reached a level that the open check system was about to collapse due to running dry, but we found a new well, the problem will continue.

    • Loias supports harsher punishments against corporations says:

      A) Credit cards are an advance of funds, not a loan. They become a loan when you don’t pay it back. Sometimes you need to spend before you have the money.

      B) Business need lines of credit for the above reason – they need to spend money on raw materials in order to make money off finished products. Removing that removes a vital business element.

      C) Some of these problems are from the very college, car, and home loans you speak of. Credit Card debt isn’t always the culprit.

      You are right, living beyond your means is the cause in many cases, but not all. Eliminating loans will not solve anything.

      • twophrasebark says:

        “Sometimes you need to spend before you have the money.”

        Very very rare. And when you don’t have loans, you do something crazy called “saving for a rainy day.”

        “They become a loan when you don’t pay it back.”

        Which is most consumers, hence why it is called a credit card, not an advance card.

        “Eliminating loans will not solve anything.”

        Sure it will. It will people from spending money they don’t have,

        • sonneillon says:

          Your solution of no loans is impractical and would destroy almost all industry in all countries. Most businesses rely on some form of credit, the bigger the business the more they use credit their credit advantage. Example if I own a warehouse facility in Denver. Does it make good business sense to pay in advance for thousands of pounds worth of merchandise without inspection, sight unseen?

  4. dragonfire81 says:

    It’s unfortunate that our western society (even today) encourages people to take on debt.

    I don’t know about you, but I still get a decent amount of credit card offers in the mail, get offered store credit cards at any store that offers them, see ads on TV all the time for home equity loans or reverse mortgages.

    And don’t even get me started on payday lenders.

    This is what happens when a strong desire for instant gratification combines with easy access to credit lines….disaster.

    • sirwired says:

      There is nothing wrong with the concept of debt and many of its uses in modern society. It can be a perfectly rational decision to take out a mortgage or a car loan. Without mortgages, most people would not be able to purchase a house until their 50′s. “Save up ahead of time” isn’t a good option since the need to pay rent in the meantime drastically reduces those savings. If you need a car, and don’t have sufficient capital to buy it outright, car loans are great! If an education loan enables you to gain a valuable education you could otherwise not pay for until you were PAST the prime of your career, then that loan made a great contribution to you, and to society overall.

      Many of the problems with reverse-mortgages have to do with the terms of the individual loans, not with the concept of a reverse mortgage. Home equity loans can be a good financial tool (say, using them to ditch a high-interest education loan, or make needed improvements/additions to your house)

      Now, credit can be used wisely or foolishly. Payday loans are a horrible trap. Many mortgages and car loans have horrible terms. An education loan can be used to obtain a worthless overpriced degree. Credit cards, they way they are used by too many consumers, are a debt noose with which few can escape. HELs can be used for vacations, electronics, and other worthless crap. But none of that makes the concept of debt a bad thing.

    • WeirdJedi says:

      I usually respect my parent’s viewpoint on debt. It is perfectly acceptable to have any form of medical debt if it means keeping you healthy or saving your life. There is the silver lining when it comes to buying a house and car or investing into college. As long as you don’t overreach or base your decision on the hopes that nothing will go wrong, you will usually succeed.

      Where I do not agree with my parents is how society currently views debt. It is as if no matter what happens, you will go into debt. Therefore you have to be prepared by raising your credit score and being in debt? Society doesn’t care that you have never been in debt before. They only care if you are able to pay them back. Took me awhile to figure all that out.

      In the long run, I think people have lower credit scores because society has failed them. I know there are many who deserve to have low credit scores, but there are some who are just trying to get by with what they have. With the unemployment crisis or even the oil spill, many people just can’t seem to keep up with the bills. Cause and effect.

  5. ChuckECheese says:

    I’m going to suggest that the take-aways from this story are:

    1. The rich are richer; the poor are poorer; and
    2. The increase of high scores comes from increased consumer knowledge of how the credit scoring game works, and their efforts to game the system to their favor.

    • u1itn0w2day says:

      Exactly, It’s just a reflection of current times and trends. It’s the ‘gamers’ that will wind up abusing the system to the point of dysfunction. But it’s their right.

    • frank64 says:

      This gaming of the system is going to be recognized by the banks, this means the score will mean less. They are already focusing much more on internal scoring and added common sense to their decision making.

  6. gqcarrick says:

    Bad credit scores will only continue to go up if the new graduates can’t find jobs before their 6 month post graduation deferment ends. Those bills will be stacking up in no time.

    • Nigerian prince looking for business partner says:

      Do federal loans no longer allow deferments for unemployment? I was able to get one years ago when I lost my job and also when I was deployed for the military.

      • gqcarrick says:

        Not everyone can go to school with just federal loans, but the case you suggest may still be in effect. A lot of kids have to get private loans too and yea there is 6 months deferment but after that you are on your own, I think you get an additional 6 months total for the life of the loan.

        • Nigerian prince looking for business partner says:

          I didn’t even realize you could defer private loans. I took out about $8k worth of private loans from Citibank and had to pay them back from day 1. I’ve wanted to consolidate them for the past few years but can’t find a bank willing to do so, even with excellent credit..

  7. ElleAnn says:

    I’ve heard that getting a score about 825 or so it really hard unless you’re older… so the increase in the number of people with excellent scores might be due more to the aging of baby boomers than to people paying off loans ahead of schedule.

    • frank64 says:

      I had a score of in the 800′s when I was in my 30′s. I only had a few credit cards, student and car and no mortgage.

      You don’t need a 800 score to do anything. The best thing to do is have a little saving so you are never late. Also make enough to pay for your bills and budget a little extra just in case. The score, especially now isn’t the only thing they look at. I have never been turned down for a loan, one reason is I always could show that it was easily affordable and I always pay my debts.

      • frank64 says:

        After rereading your post, I see where I didn’t address your point. Sorry. My post should have gone somewhere else.

      • pot_roast says:

        Medical bills can easily wipe that out. I ended up having to max my two credit cards out thanks to some medical problems. The prescriptions, physical therapy, co-pays..all that adds up really quick. My FICO score sank like a rock within 2 months. Now I’m paying the cards off, but the score has remained flat. :/

    • Nigerian prince looking for business partner says:

      I think that may play a role but in all reality, getting above a 825 is virtually impossible, and in practice anything above a 775 will open the door for prime rates.

      I think the surge of excellent credit scores has to do with the volatile market. In my situation, when I decide on whether to pay in cash or put a big down payment on a purchase (car, house, home repairs, etc.) I always compare the interest rate of the loan vs. anticipated returns if I invested the same money.

      In the past, when I knew I could get 10+ % returns on investments, it made sense to make small down payments and finance the rest at 5%. Now that returns are so low and potentially negative, I think many of us have been scared straight and are now prioritizing aggressive debt repayment vs. investments. This low utilization causes our FICO scores to shoot up.

  8. FrugalFreak says:

    Great News!

    I hope the low credit score population increases. Less people relying on credit = more resources that are less credit required. Businesses will have to lose some credit requirements in order to keep or gain customers. less credit for leasing rental units, less credit history applying to jobs and insurance qualification. when less credit is required, That shrinks the power that the Credit industry has.

    • Beeker26 says:

      Or it means they’ll just keep charging us more in terms of higher rates and/or deposits. While I wish it did, I don’t think it’s going to work out they way you think it will.

      • FrugalFreak says:

        US is only You and others, I am credit industry free. I deal with king cash. Rates go up? Then the fools that stay in it and follow along will pay for it until they get fed up of it.

  9. FatLynn says:

    I think part of the problem is the lack of transparency on how to build a credit score. We all know people who insist on not taking on any debt at all, ever, and the result is that their scores suck.

    • A.Mercer says:

      Not taking any kind of debt is better than taking on too much. I would say that the average American is guilty of taking on too much debt. Myself, I have a mortgage, an almost paid off vehicle loan, and a credit card that I pay off the balance every month. My credit score is approaching 800. It was so good that the house purchase was incredibly pain free. I don’t use a lot of credit but what I do use I plan and make sure I pay for.

  10. JacobRoss97 says:

    At age 20 I have a 721 credit score. I’ll be $60k in debt soon. Buying a house!!!

  11. u1itn0w2day says:

    The OP pretty much sums it up.

    Yes living beyond our means IS PART of the problem but the businesses selling to those of us living beyond our means feel entitled to charge living beyond our means prices due to the fact there is available credit- it takes two to tango.

    Basically credit is just another variation of the someone else is paying for it syndrome.

  12. SuperNinjaâ„¢ says:

    To this day it kills me that everybody considers it normal to have a car payment (or two).

    …Well, we did, for a WHILE, but it was paid off in a year. (Does that make me less of a hypocrite? )

    • ellemdee says:

      I also don’t get the “car’s paid off, time to buy a new one” mentality. I know people who buy a new car every two years, even though their “old” card still looks new, they live 10 minutes from work, and put very few miles on their car.

      You’re not hypocritical at all. Having a car payment and feeling like you always need to have a current-year car (and, thus, a payment) are two different things. I financed a small portion of my first new car just because I didn’t have any credit history at the time and I wanted to establish at least one line of credit on my record in anticipation for the mortgage I knew I’d be applying for a few years later. I’m still driving that car 10 years later and have no plans to replace it anytime soon barring any major/expensive breakdowns. Even if I have to put a little money into maintaining it, it’s still cheaper than a car payment. I still like it and it still looks good, so I see no need to shell out a couple hundred dollars a month just for some new shiny-shiny and the money I’ve saved means that I’ll probably be able to just pay cash for all of most of my next vehicle, saving all that interest.

    • freelunch says:

      I can’t bring myself to buy a car with debt… cash or nothing…

      before buying my first house, I wanted to buy a motorcycle… my plan was to get a loan on it, so that I would have a history of paying on a loan to help my credit… but I ended up shaving 1/3 of the price off the bike I wanted by paying cash. Debt just doesn’t work well in negotiations, which is necessary when buying motor vehicles!

    • khooray says:

      I don’t know anyone with cash to buy a new car or even a decent car. I’ve paid cash once for a car and it was $2300.00, and that was only because I’d sold one (a nicer, newer car) I had financed and made a profit and used that to pay for a 12 year old car instead. I drove it for 3 years until it started falling apart.

  13. smo0 says:

    Credit scores are (were bs) if you never plan on buying a house, having a credit card or financing a car.

    Now they come into play when getting insurance (of any kind) and a job… this is a huge deal – I think people haven’t addressed this as much as I’d like to see.

    What I see from this OP is that the rich are getting richer, the poor are getting poorer and the huge divide that separates the two just shows the elimination of the middle class.

    But overall I see the US as a whole becoming wiser with credit… we’ll see what happens after January.

  14. ellemdee says:

    I live within/below my means, never use credit cards, paid off a car loan and a mortgage in about 20% of the loan terms’ time periods, have no late payments or negative marks on my credit reports, and yet my score is only “good”, but not great. Why? No credit cards. Yeah, I know, they have benefits, rewards programs (not as good as they used to be, though), etc., but I just have no need or desire for one. With the exception of very large purchases, like my home, if I don’t have the money saved up, I don’t buy it. And yet I feel as if getting a credit card or two is the only way to improve my credit score so that my available credit (and, therefore my score) goes up. On the flip side, the person with a huge mortgage, two car payments, and 10 credit cards probably has a much higher score, even if it means they are living above their means.

    If a human looked at my payment histories, they would realize I’d be a low risk borrower (though not a very profitable one), but if my creditworthiness was judged by a computer using my credit score alone, I’d probably just be viewed as good or average. I always thought that paying off loans early was a good thing – a sign that I wasn’t overextending myself to make the payments (quite the opposite). Seems like past behavior (a pattern of on-time and early payments) would be a better indicator of creditworthiness than how many credit lines you’ve managed to get banks to keep open for you. Kinda of a messed up system, IMO.

    • FrugalFreak says:

      that non reliance feels just as good as those reward points doesn’t it? a debt free feeling trumps a mortgaged to the hilt house and new financed car feeling any day.

  15. Kevin says:

    It’s because when the bailouts started, banks rolled back the “available credit” for most customers to make their books look better and closed accounts of low activity. When you lose available credit, you lose FICO points.

  16. josephpr says:

    I have always been concerned about use of credit scores (which have little transparency) for two reasons: It would seem that financial institutions and other lenders may find it more profitable to have lowered scores so they can increase rates based on the supposed risk, and the agencies have a financial incentive to favor the financial institutions who are their customers.
    Now, I suppose we can take the argument that if you don’t like it, don’t apply for credit, but this becomes troubling to me when used by employers (when the job has no financial responsiblities) or for insurance purposes.

  17. Hill Brute says:

    Both arguments made about living within your means, and the argument that the margin to live within your means are valid. That said, the reality of the situation is simply the Credit Rating Industry is a “scam” of sorts.

    Here is why;

    The credit agencies are NOT, and were not designed to accurately gauge the credit risk of an individual, but to profile consumers who are the most profitable for companies to market financial instruments to. The “credit rating” is an in-accurate side effect of this.

    That is why credit ratings don’t take things like income and the like into account, but put much weight into things like a “mix” of credit, active credit use and recent payment history. These tools are for finance companies to use to find the best people to market to and taylor specific types of offers to specific people. Only recently has it become an over-hyped “beacon” of how honest a person is and how credit worthy someone is as an individual.

    Which brings up issue #2, the Credit Agencies are for-profit businesses looking to expand and are now selling these same flawed models as ways to gauge you for employment, insurance risk and other life changing, altering ways.

    The logic is flawed. Have someone with a low score, they tell you too.. Take out multiple high interest loans and keep a small balance on each to “build your score up”.. To get a higher score, you have to have a Mortgage, Car Loan and Multiple Revolving loans.. with balances and Open for extended periods. Want to keep a high score? They tell you to leave open and have a balance on older accounts with higher interest rates.. See where im going here?

    There are plenty of high-net-worth folks that pay cash for everything, have money in the bank.. yet, have low scores for “not playing the game”…