The credit score industry, today
Giving yourself a credit check
TEXT OF INTERVIEW
Kai Ryssdal: To the list of things given a thrashing by the Great Recession and financial crisis of the past two years or so -- that would be employment, consumer confidence, real estate and the stock markets -- you can now add personal credit scores. FICO, the company that helped create the credit score industry, said today that 25 percent of us now have scores below 600. That's a sizeable bump from pre-recession days. It means more of us will have trouble getting affordable credit.
Joan Goldwasser writes for Kiplinger's Personal Finance Magazine. Good to have you here.
Joan Goldwasser: Nice to be with you.
Ryssdal: Is it surprising to you that a quarter of the people out there have credit scores below 600?
Goldwasser: Not terribly surprising. I mean, we know that people's credit scores have been dropping. If you foreclosed on your home, that does terrible things to your credit score. It drops it about 150 points. If you stop paying your credit cards, because you just can't afford to, that also will do really bad things to your credit score.
Ryssdal: Play it out for me a little bit in terms of the entire economy. The economic recovery is dependent on people getting out and spending more and consumers being more active, yet if they can't get those loans, they can't do that, so the economic recovery sort of doesn't really get going anywhere.
Goldwasser: That's right, I mean consumer spending accounts for about two-thirds of our economy. So people will be buying the necessities of life, but they wont be buying new cars. They're not going to be buying houses. People are paying down debts, which is good for their personal balance sheets, but as you said, it's not great for the economy.
Ryssdal: Speaking of people paying down their debts, there's also been a jump in people whose credit scores are over 800. That is the people who can are paying off their debts, paying off their credit so their scores are going up.
Goldwasser: That's what they call the "super prime" category. And those people will actually see credit card offers in the mail, and they will be for rewards cards and low balance or zero percent balance transfer offers. They're people that everybody wants to have in their folios.
Ryssdal: Yeah, people who probably don't need more credit right?
Goldwasser: Probably not.
Ryssdal: Alright from super-prime then to sub-prime, I guess, there's been a jump in the number of people with credit scores nearing 300. Pretty much the bottom of the barrel. How do you survive in such a credit-oriented economy when you can't get credit?
Goldwasser: You probably don't have a credit card. But if you need to borrow money, if your car needs to be repaired or you get sick, you're really in bad shape and you may be forced to go to a payday lender or somebody that's going to charge you a usurious rate of interest.
Ryssdal: Which will do eventually nothing for your credit score, right?
Goldwasser: Oh no. You'll probably just get deeper in debt.
Ryssdal: We've had this amazing credit event the past two and half, three years in this economy. Credit scores are completely out of wack. Might lenders now say well you know, 600 is OK; 550, we can do that -- and they won't be looking for the 750, 800 credit score people anymore?
Goldwasser: We haven't seen any evidence of that. What we've been seeing is really the opposite. People who have credit cards have seen their interest rates go up. We've seen the credit lines cut back. I mean, we've seen banks try to get their own balance sheets in better shape and I don't know whether they're going to start to be more lenient now.
Ryssdal: So I have a confession to make, you ready?
Ryssdal: Before I bought my first house, I had no idea what my credit score was. I would not have known how to find it if you had told me. Are we now, in light of the credit problems we've had, paying too much attention to credit scores and if people just paid their bills and did what they were supposed to do financially, wouldn't everything work out?
Goldwasser: Well, actually it would. Your credit score doesn't really matter at all if you're not in the market for credit. I mean, it's going to fluctuate a little bit and it doesn't really matter. It's only if you're about to make a large purchase within the next six months to a year that you want to be careful about what your credit score is and make sure that you don't do anything that will harm it.
Ryssdal: Yeah, and then of course, by the time you figure it out and you're about to buy that house and you figure out you have a credit score of 427, it's too late.
Goldwasser: That's true. If it's that bad, you're in real trouble.
Ryssdal: Joan Goldwasser from Kiplinger's Personal Finance Magazine. Joan, thanks so much for your time.
Goldwasser: Very welcome.