By Brad Finkelstein
According to a recent FICO study, over one-fourth (25.5%) of Americans have poor credit. Nearly 43.4 million people now have a credit score of 599 or below. LowCards.com, which provided this information, said that number is expected to grow as households continue to struggle through unemployment, credit card debt and foreclosures.
It took years of overspending, overlending and poor regulating to create these problems. Lenders, and even the government, share some of the blame, says Bill Hardekopf, CEO of LowCards.com.
Among the things he says are causing lower credit scores are increases in consumers’ debt-to-payment ratio. A higher debt-to-credit ratio is considered a higher risk and can result in a drop of about 20 points.
A few late payments on a credit card or other loans can lower your score by as much as 100 points if you have a good score, or 80 points for someone with an average score. Defaulting on a loan or a foreclosure may lower a score by as much as 200 points.
The good news is that the older the negative item, the less impact it will have on the credit score. A collection that is five years old will hurt much less than a collection that is five months old.
“When consumers have made poor financial choices and have damaged their credit score, they are on their own to fix it. There is no federal bailout or TARP fund that will rescue them,” says Hardekopf.
There are ways for consumers to increase their credit score, but it takes time and there is no quick fix.
First, have the consumer get a copy of their credit report from all three major repositories. If any of the information on a report is incorrect, contact the agency to correct it.
The next change is behavioral, namely paying bills on time, even if it is only the minimum. This is the single most important factor in the credit score, he says.
Pay off debt because high balances and high debt ratios drag down credit scores. A consumer’s debt balance should be less than 35% of available credit.
A long history of good payments on a car loan, a mortgage, or a credit card increases the credit score. Keep older credit card accounts open, even if they are not being used, because the algorithm rewards a long, positive credit history. If there are many accounts that are not being used, close the newest ones first.
Limit the new credit applications being made, because too many new accounts can lower the score. The exception is shopping for a mortgage or a car loan, as multiple inquiries for the same purpose in a reasonable period are considered a single inquiry.
If they don’t already have one, the consumer should open a checking and a savings account. They should not co-sign for a loan for someone else. Finally, if they can’t pay their bills, contact the creditors or see a legitimate credit counselor.
