Credit Score Strategies in Recession

As the recession drags on, more people find their all-important credit scores slipping. The growing number of foreclosures and credit card delinquencies are adding to many household’s debt and low credit scores. Star Tribune article offers some suggestions what you can do about it.

As lenders continue to tighten credit, your score will become even more important in determining if you qualify for a loan and what kind of rate you’ll have to pay.

Americans' credit scores, the three-digit number that determines whether you'll get a loan and how much you'll pay for it, have taken a beating.

Millions of consumers' scores have dropped, making it more expensive for them to borrow money -- or even impossible if the score has sunk low enough.

The falling credit scores are a reflection of the times: plummeting home values, record foreclosures and the overall recession. At the same time, lenders are applying stricter standards to borrowers, including requiring higher credit scores.

What many people are experiencing now -- foreclosures, late credit-card payments -- will bring down their credit scores.

Credit expert Evan Hendricks told the Tribune "There's no question a foreclosure can really slam your score," . "It will easily send you into subprime territory."

Overall, he said, two major factors are bringing down credit scores: late payments because of the economy and credit-card companies reducing credit limits, meaning people are using a greater percentage of their available credit.

Walking away from a house takes a toll on a foreclosed homeowner's credit. But so do late payments -- in particular those that are more than 90 days overdue. According to Fair Isaac, bankruptcy, credit card defaults and foreclosures stay on a person's credit report for seven years. That said, a single bad account such as a foreclosure would be better than a bankruptcy, which usually involves many defaulted accounts. But if all other bills remain current, Fair Isaac says a foreclosed homeowner's score could begin to rebound in as little as two years.

Most lenders say a score of 650 or below indicates a high credit risk that could mean higher interest rates or a tougher time getting credit. Information for the score is based on that person's credit report.

The top 25 auto lenders and credit-card issuers use some version of the FICO score to make lending decisions, as do 90 of the top 100 U.S. financial institutions. It's common for mortgage originators to pull credit scores from all three major credit bureaus and average them to help determine a consumer's interest rate.

The same general rules apply today that have applied for the last 20 years to keep your score in contorl: pay your bills on time, keep balances low relative to the limit and take on new credit only ... when needed. Those consumer habits are going to steer you in the right direction, reported the Tribune.

(June 15, 2009)