Deciphering FICO: More Than a Third of Scores Now Under 650

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.