One in four Americans have credit trouble
Discipline key to climbing the mountain
SALT LAKE CITY — Having good credit saves you money. But now the definition of good credit is changing, putting more pressure on consumers to get clean and stay clean.
More entities are using credit scores and have identified certain tiers of credit risk, said Al Bingham, mortgage adviser for Murray-based Republic Mortgage and author of “The Road to 850: Proven Strategies for Improving your Credit Score.”
“Four years ago, if you got approved with a 620 credit score, you got the same rate as someone with a 750 credit score,” he explained. “That’s no longer the case.”
In the fallout from the recession, Bingham said that credit scores have decreased approximately 12 points during the past five years.
Last year, about 46 percent of all FICO scores were below 700, according to Fair Isaac Corp. — with nearly 25 percent of all scores below 600.
“That’s huge — one in four Americans,” Bingham said. “If you’ve got a score below 600, you’re out of the (credit) market.”
It means those working to rebuild their credit have a higher mountain to climb. But it's not insurmountable.
For Janell Austin and her family, the rocky road to financial chaos began in 2006 just as the housing bubble was ready to burst. They were consumers at the trough of too-easy-to-get” credit and have paid the price.
“We bought the house at the peak, just before everything went south,” the 28-year-old married mother of two explained. They bought their first home for $270,000 in West Jordan, and then proceeded to acquire the trappings of what they thought would contribute to a happy family life.
But unexpected expenses and overspending began to propel the Austin financial ship into troubled waters.
“I had surgeries and my husband had an emergency surgery and the kids were sick — they were in the hospital a couple of times,” she said. “Buying a trailer, buying a truck and other things all started to pile up.”
They were so financially strapped, they were living like “college students basically.” After paying on all the credit cards and consumer loans each month, they had little money left over to meet their basic needs like groceries.
“We just got head over heels with our budget,” Austin said.
Then, in 2007, the housing bubble burst, the economy faltered and they became one of the scores of Utah families who found themselves upside down in their mortgage and watching their credit rating plummet right along with it.
They eventually had to take an $110,000 loss on the property when they sold it for $160,000 in a short sale in February 2010. They then set off on repairing their damaged credit.
“I figure it’s my responsibility to fix my credit,” Austin said.
With some diligent planning and disciplined saving, they were able to pay off $26,000 in debt and are hoping to get into good enough shape credit-wise to purchase another home in the next year or so.
The Austins’ situation is not uncommon. Lenders have tighter restrictions on available capital and credit scores are a key barometer to qualify not just for cars and houses, but also for employment or insurance applications as good credit is becoming a barometer of good character.
During the past five years, what is needed for preferred credit status has changed. In 2007, 620 was considered a suitable credit score for better interest rates. Today 680 is the minimum and 720 is the preferred baseline score for most potential creditors, speaking of FICO scores, the industry standard
He said that in the current credit environment, someone applying for a mortgage with a 620 credit score would likely pay an interest rate that is 0.5 percent to 0.75 percent higher than previously.
“The risk really impacted people all along the credit score spectrum, especially those below 680,” Bingham said. “(If you’re under 680), you’re going to get hit pretty hard.”
That means paying more to obtain credit cards, auto loans, home mortgage loans and insurance products — roughly 60 percent to 70 percent more than just a few years ago, he said.
“Lenders are taking on more risk and they have identified that the credit score is a huge indicator of credit risk,” he said. “They’ve (figured out) that they have higher default rates at lower credit scores and they are going to start charging more interest.”
Originally founded in 1956 as Fair, Isaac and Company by engineer Bill Fair and mathematician Earl Isaac, FICO is a measure of credit risk that is available through all of the major consumer reporting agencies in the United States Equifax, Experian and TransUnion.
The credit score range for the standard consumer FICO score is 300 to 850.
According to thetruthaboutcreditcards.com, the most important factor in determining your FICO score is payment history —accounting for 35 percent of the overall scoring criteria. Payment history includes all revolving and installment accounts, including mortgages, auto loans, credit cards, charge cards and student loans. In addition, this section also takes into account public records and collections, bankruptcies, foreclosures, tax liens, judgments, and charge-offs.
Another important factor in determining your FICO score is the amount owed on accounts, including the total balances on each one of your lines of credit in proportion to the amount of total credit available. For example, if you have $10,000 in total available credit with an $8,000 balance leaving just 20 percent left available, then your credit score could be adversely affected because creditors could consider you overextended.
A third factor in determining a consumer’s FICO score would be the length of credit history established. A consumer with a long mortgage history will likely have a stronger credit history than someone with a long history of just using credit cards.
When measuring credit scores, a rating in the 800-850 range is considered the ultimate. Consumers in that range have essentially flawless credit.
A credit score of 760-799 is considered good to excellent, and will usually receive interest rates and approval rates similar to those in the 800-plus category.
A credit score in the 720-759 range is not that much different from the previous category, though there are some credit thresholds for FICO scores of 760 and above.
A score in the 680-719 bracket is still considered to be good credit, though possibly with a minor flaw or two. Most consumers in this range would probably still be able to qualify for most loans and auto or rental leases, however, interest rates may be higher.
Credit scores from 620-679 are common and loans can be obtained. But depending on the lender, there may be restrictions and the path to a new car or credit card will be more expensive.
For those consumers in the 580-619 range, they fall into the higher risk category. Credit scores in this range are clearly below average, and would have a tough time securing a loan or applying for a credit card.
On the lower end of the spectrum, FICO scores in the 500-579 bracket are in need of repair. Consumers in this range often have a major derogatory mark such as a collection, charge-off, mortgage default, foreclosure, or bankruptcy.
Those with FICO scores below 500 may want to consider contacting a professional to help improve their standing.
Analysts encourage consumers to take a vested interest in monitoring their personal credit record by reviewing their credit report at least once annually, which can be done for free at www.annualcreditreport.com, said Don Milne, Zions Bank financial literacy manager.
Many times consumers can help themselves repair their credit without spending thousands of dollars to do so by utilizing low-cost or no-cost sources.
“There are lots of free resources out there for people that they can take advantage of,” said Preston Cochrane, president and chief executive officer at AAA Fair Credit Foundation — a non-profit financial education and credit counseling agency in Salt Lake City.
He said having such a low poor score could also have a dramatic impact on a consumer’s cost of accessing credit.
“If you have a credit score of 620 versus a score of 760 — on average consumer debt — you’re probably paying $600 to $800 more a month,” Bingham said.
He noted that one major insurance company has listed the credit score as the top factor in determining their auto premiums — ahead of DUI’s, accidents and claims.
“That’s how dynamic the score has become,” he said. “They have demonstrated that credit scores are a valid indicator of insurance risk.”
He added: “What accounts do you need to keep, what accounts you need to close, what accounts you need to use and what accounts you need to pay down?” Bingham said. “If you get (the answers) to those questions, you’ll win.”
Credit Score Range
800-850 — Superior, flawless credit
760-799 — Very good to excellent, usually receives best interest rates
720-759 — Good to very good, exceptionally creditworthy
680-719 — Average to good, able to qualify for most loans
620-679 — OK to average, could use improvement
580-619 — Below average, requires improvement
500-579 — Very bad, in need of serious repair
<500 — Worst, poor credit risk