New Report Shows 35% of Consumers Have FICO Scores Below 650

Earlier this week FICO released data on score movement changes since the recession began. Essentially they’re the most significant score changes in nearly 2 decades.  More people score below 600 (25.5%) than ever before.  And, more importantly, more people score below 650 (35%) than ever before.  Here's my take on the data and what it means to consumers:

1. There are two reasons why scores would have migrated toward the lower end of the scoring scale; negative information hitting a credit report or a run up of credit card debt. This means that more and more consumers are feeling the hit because of credit card defaults, mortgage defaults and repossessions. And those who have lost their jobs are depending more heavily on credit cards to make ends meet.  This is bad news because it's clearly not sustainable. 


2. The news is actually worse for those who now score below 650 than those who score below 600. The percentage of people who score below 600 shouldn't be a focal point because those folks aren't even close to being approved for loans in today's credit world.  650 is a more realistic focal point and the percentage of people who now score below that score mark is 35%, which means that more than one-third of the U.S population is not credit-worthy for anything other than a subprime credit card or a subprime loan.  This is a big deal.


3. What this means is fewer people will apply for new loans because they either won't be able to afford the payments, won't get approved or won't want to pay higher rates.  


4. It also means more people will pay more for homeowner's and auto insurance because insurance companies generally use credit scores to help them set premiums.


5. More bad news: Scores this low (<650) are generally not actionable, meaning they take a very long time to improve because the negative info that's causing the lower score stays on file for 7 years. So, if we're expecting these 35% who have FICO <650 to participate in any sort of large scale economic recovery – good luck.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.