Deciphering FICO: More Than a Third of Scores Now Under 650
- John Ulzheimer on 7/14/2010
- 20 comments
- random
by
Share This
photo: TheTruthAbout…
Statisticians call it a “flattening of the curve,” and it represents the movement of a population into the tails of a distribution.
You are now probably confused. OK, no more statistics mumbo-jumbo, I promise.
Let’s just say that for the first time since the installation of the FICO credit bureau based scoring system in 1989, 35% of the population is now scoring below 650. This is up from 27%, which was largely unchanged for much of the past two decades.
Deciphering the numbers
Each of the big three credit bureaus — Equifax, Experian and TransUnion — maintain between 200 and 250 million credit file records, which means between 70 and 87.5 million consumers are now scoring below 650. To make matters even worse, 25.5% of them (or roughly 51 million people) are scoring below 600. To these folks “credit” is now as distant as, say, retirement. It just isn’t going to happen any time soon.
That 650 score break is meaningful because in today’s financial services environment many lenders and insurance companies consider the +/- 650 point to be the dividing line between prime and sub-prime. What this means is more consumers are going to be denied or adversely approved (that means you’re approved for a loan, but with punishing rates or terms). And if someone is waiting for the U.S consumer to spend us back into a fully functioning and healthy economy, that push won’t come from those folks.
There are some who have argued that this drop in FICO scores is actually healthy and is being caused by our insatiable appetite for things that require us to get into too much debt. This is simply not true. For any of you who know anything about FICO scoring, you know that you don’t end up with scores below 650, and well below 650 in most cases, because of secured and/or unsecured debt.
No, the real reason you end up “down there” is because of negative information hitting your credit files. The debt contributes to really low scores, but it doesn’t drive really low scores. What this FICO data reflects is an extraordinary number of consumers who now have foreclosures, settlements, charge offs, collections, bankruptcies, liens, judgments, late payments and repossessions on their credit reports, and much lower scores as a result.
The consequences
What makes this news even more disturbing is the fact that the aforementioned negative items remain on your credit reports for between seven and ten years. This means scores that are trending lower will continue to do so for many years to come and will stymie any sort of consumer-based economic recovery. Add to that an unemployment rate of nearly 10% and an “underemployment” rate (employed but not making what you were making) that’s much higher, and you’ve got truly bad news.
The lone bright spot in the FICO data is that negative information does eventually have to be removed from your credit files. It can’t persist indefinitely. And, as it ages it loses negative value, which means if you do nothing other than exist, your scores will improve organically over time. It’s just going to make loans, credit cards, and insurance more expensive for the next few years.
This FICO score data isn’t bad news for everyone. And, as I always say, “when it gets dark outside, the rats and roaches come out to play.” If you assume that consumers won’t subject themselves to credit “prohibition” for the next seven to ten years you have to conclude that they will be doing credit-based business with someone. And this means super subprime lenders such as pawn shops, title lenders and payday lenders will be there to mop up their fair share of the demand. These are obviously some pretty bad options that should be used only if you are truly desperate for short-term funds.
So, digest this FICO data and then throw it out because regardless of why there are now 70,000,000 consumers with FICO of 650 or less, what really matters is what your FICO scores are. And, as you’ll learn from reading me over the next few months/years, FICO scoring is a very individual measurement based on what you’ve done lately rather than what we’ve all done lately. Thanks goodness for that!
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.
Related Videos
Popular Articles
20 Comments so far
leave a commentYes, but many of those foreclosures, settlements, collections, bankruptcies, etc are probably because of over spending or failed planning. If Americans weren’t living such an consumerist lifestyle that is beyond their means, they wouldn’t owe the bank their possessions.
I’m not so sure about that Allen. Most bankruptcies are filed for reasons other than irresponsibility. And certainly nobody expected or wanted a 10% unemployment rate and a much higher underemployment rate. I’m not saying that we, the consumer, have no burden to shoulder here but we’re certainly not the root cause. I mean let’s be honest, borrowing to buy a house is technically living beyond our means especially if we lose our job.
John, you make a good point that losing a job may halve or even eliminate a family’s income, but the national unemployment has risen, what? 5% from the good days? A 5% increase in unemployment shouldn’t equal an 8% increase in <650 FICO scores.
And what were those 27% of people doing with such a low score anyway? You can't tell me it's good for our country to have over a quarter of the nation regularly missing payments, being foreclosed, and and experiencing all the other financial trouble that leads to a <650 score. I think it's definitely indicative of a culture that needs to be a little more focused on saving rather than spending.
That, in my opinion, is the root cause.
The idea here is that to survive, people need to have credit is totally false. Our country will be much stronger when people pay cash and the blood sucking banks stop removing money from consumer’s pockets. If a person pays cash for a house,, the will have hundreds of thousands of extra cash over their lifetime. No car loans, then tens of thousands more, etc.. The amount of money extracted by banks and finance companies could make a gigantic difference and contribute to a more productive society. The money banks charge in interest is money not being used by consumers to buy other good and services.
How dumb is it to deposit money in a large bank and then that bank invests it over seas in some crazy scheme. Why not keep the money at home and invest it in you neighbor? The entire system needs to change. Low credit scores are the first step out of
What other reasons besides irresponsibility(I prefer stupidity) are there for bankruptcies? By definition you owe more than you have, which is irresponsible.
Here are the primary reasons for the overwhelming majority of BKs filed each year. As you’ll quickly see, it has very little to do with stupidity or any sort of moral failure.
Medical debts – We certainly don’t choose to get sick
Divorce – Again, not something we “apply” for
Loss of job – Again, usually the choice of someone else (also included here is failed business in addition to workforce downsizing)
Death in the earning family – Do I even need to comment on this one?
And yes, some BKs are caused by irresponsibility.
So what exactly is this article about, i don’t think he even knows what hes talking about. You should go back to school instead of writing blogs.
Thanks for the advice. It’s too bad they don’t teach this stuff in school, which is one of the reasons you should be listening to respected industry veterans.
John, the bankruptcies also reflect that those that perhaps were doing ok werent saving any money which is epidemic in the US now. While a small percentage of bk’s are medically driven, i would argue that the majority are driven by a lack of a spending plan and savings as well as frivolous buying patterns which is certainly irresponsibility.
Too many people are focusing on repairing their credit or maintaining their credit score to have available credit(modern day savings account\SARCASM), rather than focusing on trimming the fat and saving for a rainy day.
The problem with the economy lays squarely on the shoulders of fiscally ignorant consumers that took on way more than they should have and certainly should have known so. You can blame the banks all day long, and sure there were some crooked loan brokers pushing crap loans that probably wouldnt be paid back…but you can rest easy knowing the “its all about me” consumer was salivating at the mouth waiting for that closing check and pick up their new plasma tv and put a down payment on the escalade they couldnt afford.
Who cares about a credit score. I don’t have one nor do I care. I buy things I can afford, with cash when I can. I really hope that the credit bureaus go up in flames soon. It is just a huge scam designed to take advantage of people.
Do you have any idea how important the credit bureaus are? Imagine how much more expensive and unfair it would be to borrow money if lenders had to make decisions without credit reports and scores? Instant credit? Kiss it good-bye. 4% mortgage rates? Gone. We don’t hear many complaints from the folks who have good credit.
Allen,
Let me tell you my story, IAnd then you decide where I fit. Am I irresponsible or not? I consider situations like my to be the norm.
I am now 62. I bought my first house in 20004. Standard 30 year mortgage with almost 20 percent down. I had money invested and a credit score approaching 800. I owed nobody anything until I bought the house.
A few months after I bought the house, I lost my job through no fault of my own. I was in charge of accounting at a small enterprise. I lost my job over a disagreement with the new head coming. The new policies were not only illegal but foolish. A nearly one hundred years old businss closed down for gor in 2008. I was proven right.
Ever since I have been working contractually as a bookkeeper. (Could not find a regular employment). In 2006, my business was starting to improve, but then hard times hit, and my customers started going out of business. Thus, over the last several years, my income has been but a small fraction of what it used to be.
I still have my house, but all my money is gone, and I borrowed on credit cards. My rates used to be mid single digits. These were all raised to nearly 30% for no reason at all. My credit score was still over 750. I cancelled my health insurance. Well over two hundred a month with five thousand deductible. Then, I had issues, but it didn’t matter. They weren’t that great. They ended up costing me what I would have paid with insurance anyway.
I quit paying on the credit cards. Couldn’t do so and keep my house. I still got house, but there are no buyers in the mountain area. So, I rent rooms in it, but population is thin. And, I must go out of state to work. I had about 100K when I lost my job. Heck, and I thought that I had enough money for an emergency.
All the customers I lost in the last couple of years, they all have similar stories. Some lost small business that have been around for ten years or much, much more in some cases. Some lost the real property in which they ran their business and some also lost their houses. When a person has a business that does two million a year, and all of the sudden it just dies, what does that person do? Everything is gone. Even employees fall into hard time.
I am still holding, but for how much longer?
Robert, that truly is a heartbreaking story. The fact that you were so well prepared and were still taken down by the ailing economy is a testament to the great need we have for some leadership to get us back on the road. How to do that, I don’t know because I’m no economist, advisor, etc.
However, while you say many of your experiences with clients and friends indicate that you are the typical sufferer, I am going to have to disagree. People tend to associate with others in similar socioeconomic status as themselves. For example, my family does not know a single self employed worker, or anyone who has gone into bankruptcy. This is not to say that we’re all better prepared or smarter, but rather that we are luckier and not as vulnerable to the downturn.
You cannot assume that all of the 5% increase in unemployment immediately had some horrible financial trouble. So then, if less than 5% of the working US population were met with serious financial ruin, where did this 8% increase come from? And my point still remains that we as a country are ok with a status quo of over 1/4 of American consumers having serious debt problems.
Anyway, I know this matters very little to someone who is struggling, because regardless of everyone else, you yourself are having a hard time in this economy and that’s 100%. I wish you the best and hopefully you will catch a break sooner rather than later!
John, but what about people who took out home loans that they really couldn’t/shouldn’t afford, in addition to buying a brand new car and a boat, and…
I don’t know what the LONG-term recovery plan is, but I hope it isn’t predicated on consumers returning to an irresponsible borrowing mentality, because I personally think that THAT is is a major factor in why we are in our current situation.
I agree. I have zero sympathy for them unless they were the victims of some sort of mortgage fraud, which is more common than you’d expect considering the number of people who have to be in on the scam.
Unfortunately people, like lenders, have very short memories. Once home values begin to rise again lenders will open up the flood gates.
I realize this is from last year and all, but far more than a “small percentage” of bankruptcies in this country are due to medical bills. Seems the numbers indicate it to be around 60%.
http://www.cnn.com/2009/HEALTH/06/05/bankruptcy.medical.bills/
Interesting additional note from that article:
“Overall, three-quarters of the people with a medically-related bankruptcy had health insurance”
Yep, medical debt is a huge contributor to BKs
As a responsible person who had to go through a custody battle, help pay for my grandfathers funeral cost, and my grandmothers pacemaker, car note and rent and utilities on a 23,000 a year job that you’ve worked at for 7years. You feel like the system some how failed you. I went to a 2yr college and still can’t afford to finish my bachelors. As a mother it should be easy by because of all of my money troubles have landed me with a 650 score that only took 2 month to go from 780 just because you fall on hard times. There needs to be a law that allows you to forgo payments for 60days so that you can get you family drama in order. If Obama wants to help he should start there.
Are you referring to 650 under the old or new scoring system?
FICO scores make less sense these days. If you don’t use your credit cards, the bank may knock down the limit, thus increasing your usage ratio. It also doesn’t take into account family income.
As well, right before the new law, lots of banks took the preemptive strike of raising interest rates and promising to lower them later if warranted. To me, that translates into less use of the card therefore greater possibility that credit limits would be reduced, thus usage ratio raised and credit score affected to the negative.
Maybe Fair Isaac should consider reworking their formula and we should all be allowed to have our credit SCORES free once a year.