Competitor: This article comes from Randy Mitchelson.
Entry Category: Approaches to Building and Using Credit
In the DailyDollar post, “Debt Is Down So Why Are Credit Scores Down?”, we presented a puzzling question. American consumers have been paying down their mortgage, auto and credit card debt in a big way since the economic crisis began in 2007.
However, over that time frame, consumer credit scores have not improved despite the lower debt levels. According to creditkarma.com, the national average credit score is 660 down from 665 a year ago. You might be one of those people. How could this be? Here are three reasons:
1) Economic Crisis And Recession Caused Credit Score Drops
Of the consumers who had excellent credit in 2007, more than one-third had only good or worse credit in 2011 according to the Center for Financial Services Innovation (CFSI). In addition, of the people with good (but not excellent) credit in 2007, 30% dropped to the sub-prime credit level in 2011.
Regardless of the reason, access to high-quality credit is expensive or inaccessible for millions of Americans today that didn’t face that challenge five years ago.
This affects whether you are approved to rent an apartment, get a job, qualify for a credit card, as well as how you pay for your mobile phone, utilities and insurance.
2) Tens Of Millions Remain Outside Credit Scoring System
Another reason why American debt levels can be dropping but not positively impacting credit scores is the fact that as many as 70 million consumers have thin or no credit files. This means that there is little or no information in the three major credit bureaus to document those people’s repayment behavior and calculate a score.
3) Banks Have Slashed Credit Limits
In the DailyDollar post “Bank Of America Froze My Credit Line And Impacted My Credit Score”, you can see a perfect example of how your credit score can drop even though you did nothing wrong.
I have perfect credit (and am here to help you get there too). Despite that, when Bank of America dropped my credit line, my debt utilization rate increased overnight. That’s a huge factor in calculating a credit score.
The same thing happened to tens of millions of consumers, regardless of their credit rating. Wen the economic crisis began, consumers received letters from their banks notifying them that their credit card and other lines were being frozen or slashed, or both.
In fact, some consumers are sub-prime today and don’t even know it. Why would they? They have made all their payments on time. But because their credit card limits were lowered by their bank, their credit scores dropped overnight.
Despite these reasons why American credit scores are falling, the silver lining is that our collective indebtedness is falling too. Credit scores are in our control for the most part. Over the long term if we pay our bills on time and do not overextend ourselves, our credit scores will rise.