Posted by Dewey Kearney on August 11, 2010
By EILEEN AJ CONNELLY
The Associated Press
Monday, July 12, 2010; 11:08 AM
NEW YORK — The credit scores of millions more Americans are sinking to new lows.
Figures provided by FICO Inc. show that 25.5 percent of consumers – nearly 43.4 million people – now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.
Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.
“I don’t get paid for loan applications, I get paid for closings,” said Ritch Workman, a Melbourne, Fla., mortgage broker. “I have plenty of business, but I’m struggling to stay open.”
FICO’s latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO’s 300-to-850 scale weren’t as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.
More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual’s score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.
On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9 percent, which is notably above the historical average of 13 percent, though down from 18.7 percent in April 2008 before the market meltdown.
There’s also been a notable shift in the important range of people with moderate credit, those with scores between 650 and 699. The new data shows that this group comprised 11.9 percent of scores. This is down only marginally from 12 percent in 2008, but reflects a drop of roughly 5.3 million people from its historical average of 15 percent.
This group is significant because it may feel the effects of lenders’ tighter credit standards the most, said FICO’s Jennings. Consumers on the lowest end of the scale are less likely to try to borrow. However, people with mid-range scores that had been eligible for credit before the meltdown are looking to buy homes or cars but finding it hard to qualify for affordable loans.
Workman has seen this firsthand.
A customer with a score of 679 recently walked away from buying a house because he could not get the best interest rate on a $100,000 mortgage. Had his score been 680, the rate he was offered would have been a half-percent lower. The difference was only about $31 per month, but over a 30-year mortgage would have added up to more than $11,000.
“There was nothing derogatory on his credit report,” Workman said of the customer. He had, however, recently gotten an auto loan, which likely lowered his score.
Studies have shown FICO scores are generally reliable predictions of consumer payment behavior, but Workman’s experience points to one drawback of credit scoring: the automated underwriting programs lenders use can’t always differentiate between two people with the same score. Another consumer might have a 679 score because of several late payments, which could indicate he or she is a bigger repayment risk. But a computer program that depends just on score won’t consider those details.
On a broader scale, some of the spike in foreclosures came about because homeowners were financially irresponsible, while others lost their jobs and could no longer pay their mortgages. Yet both reasons for foreclosures have the same impact on a borrower’s FICO score.
In the past too much credit was handed out based on scores alone, without considering how much debt consumers could pay back, said Edmund Tribue, a senior vice president in the credit risk practice at MasterCard Advisors. Now the ability to repay the debt is a critical part of the lending decision.
Workman still thinks credit scores alone play too big a role. “The pendulum has swung too far,” he said. “We absolutely swung way too far in the liberal lending, but did we have to swing so far back the other way?”
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Posted by Dewey Kearney on August 2, 2010
Many people who are forced to go through a bankruptcy feel that their “credit life” is all over. They have been told by friends that the bankruptcy will stay on their credit report for up to 10 years (true) and that they will never be able to get credit from anyone until that is taken off their credit report (untrue). They have also been told that their credit score will remain in the basement practically forever (also not true).
If you have a lot of debt then your credit score probably is in the tank anyway and until that debt is taken care of your credit score will remain in the tank. However I have some good news! Once your bankruptcy is discharged (approximately 60 days from the time it is filed) you can start to rebuild and if you want to have any kind of a life you must. Should bankruptcy be your first flinch when you are over your head in debt? No you should try to work things out with the people you owe. If however you have tried all this and it hasn’t worked then it’s time to take a proactive approach.
About 20 years ago I was in the same condition financially. My debt had gotten totally out of hand and I was unable to get a handle on it. Creditors were calling all the time, my wife and I were in total despair. Someone that I respected sat me down and talked to me like a good friend is supposed to. The next day I spoke to a bankruptcy attorney and things never looked so bright. After this things started to get better. The harassing phone calls and threats stopped. Best of all, my beautiful wife started to smile again. If this sounds like you let me encourage you to take two minutes to fill out the form and you will be put in touch with one of our bankruptcy attorneys. We have them in practically every city in the country. There is no charge to speak with one of them so what do you have to lose besides a mountain of debt?
Then we can start rebuilding your credit. You need credit and probably will not qualify for an unsecured card. So what do you do? Get a secured credit card. The pre-paid ones are really just a debit card and do not report your payments. They will not help increase your credit score but a secured credit card will. If you don’t take action to rebuild your credit score it will remain low. You can’t take the “cash only” approach in this day and age. You need credit and must begin rebuilding as soon as your bankruptcy has been discharged.
What you must have is a secured credit card. A secured credit card requires a cash deposit as collateral in return for being granted a credit limit. Many of those who sign up will be granted a far higher limit because of the minimal risk that the lender faces. It also means that, unlike an unsecured credit card for bankruptcy, approval is guaranteed. The lender will report all monthly repayments to credit reference agencies. After about 12 to 18 months of making your payments on time you probably will qualify for an unsecured credit card. But start and watch your credit score climb! You can and will soar like an eagle once again!
Posted by Dewey Kearney on June 28, 2010
Now that everything is over you’re probably realizing you’re not sure of what to do next—what happens after bankruptcy? Well, not much–unless you make it happen.
All of your past debts on your credit report should be marked down as “included in bankruptcy”. After your bankruptcy has been discharged order a copy of your credit report and make sure everything you have listed in your bankruptcy has been noted as such because often companies will leave your past debts marked as overdue or late. Have those negative items noted as included in the bankruptcy. When you notify the credit reporting agency be sure to include the case number so they can verify it.
If you let your past problems make you feel ashamed, and avoid doing anything about your finances after bankruptcy then your credit score will remain very low. Keep in mind that this is but one moment in time and in time this will all age off of your credit report. Now is the time to build a new credit history.
In order to build up a new credit history, and a new life, you need to take charge and make things happen. Get a secured credit card and this will be the first step in rebuilding some new credit history. Use this new secured card lightly, less than thirty percent of your limit, and pay it back each month to show that you have learned from past mistakes.
The second step is to build up an emergency fund. While this won’t directly affect your score, it is a discipline that will help because if something breaks you’ll use your savings instead. With $1,500 in a savings account when you have unexpected expenses you’ll be prepared.
The third piece in this puzzle is a newer automobile. Many people feel that they won’t qualify for an auto loan but with the current economic problems that isn’t so. However you probably won’t qualify for a loan from a major bank. Get pre-qualified for an auto loan, go shopping and have fun. If you have a steady income of at least $1500 per month you will qualify. Being pre-qualified you will be given an approval notice that you give to the auto dealer when you select your new car. Don’t let them talk you into more automobile than you are prequalified for; they will try. Stay with the plan otherwise you will be in trouble again. The interest will be a little higher than you prefer but that cannot be helped now. That will improve down the road.
You may be inclined to sit back and avoid your finances after everything you’ve been through, but if you don’t make it happen, nothing will happen after bankruptcy, and eventually you’ll come to regret that. Build up a new healthy financial history and you will be pleasantly surprised at how quickly your credit score rebounds.
Disclaimer: This information has been compiled and provided by www.1-800BadCredit.com and www.1-800BadCreditBlog.com as a service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person’s situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.
