Consumer Credit Scores Head South
ROBERT SIEGEL, host:
And now, an unsettling economic indicator: Credit scores.
MICHELE NORRIS, host:
At least one quarter of consumers with active credit accounts, or 43 million people, now have credit scores below 600. A low credit score is like an albatross that will make it harder for all those consumers to get loans or credit at favorable rates for months and maybe years to come, if they can get access to credit at all.
For more on this, we turn to John Ulzheimer. He's the president of Credit Education at Credit.com. Welcome back to the program.
Mr. JOHN ULZHEIMER (President, Credit Education, Credit.com): Thank you, Michele. Glad to be back.
NORRIS: Now, on a scale of credit in terms of what's good and what's bad, what does 600 represent as opposed to say what might represent a good credit rating?
Mr. ULZHEIMER: Well, a 600 is a very, very poor score. Even in the heyday of credit four and five years ago, when they were giving away money, a 600 was still considered to be very, very subprime.
The interesting thing about these statistics is the percentage of people not only that fall below 600 but, additionally, the percentage of people who also fall below 650, which is a key dividing line today between prime and subprime. That percentage of people is 35 percent or 70 million people now are considered elevated credit risk by the lending environment.
NORRIS: Hmm, as I understand it, normally about 15 percent of consumers have credit scores that fall within the worst category, about 25 million people. Have you seen that kind of percentage increase in the past and over such a short period of time?
Mr. ULZHEIMER: Absolutely not. This is the most significant shift in FICO score distribution that I have ever seen. And remember, the FICO score has been largely available only since 1989, so a shade over two decades. This is the first meaningful distribution shift that we've seen since then.
NORRIS: What exactly does that mean if they try to get a car loan, if they try to get a credit card, if they try to apply for a mortgage, say, one year from now?
Mr. ULZHEIMER: Well, for people who are applying for loans and insurance who have FICO scores in the 600 to 650 range, they're either getting straight out denied or if they are getting approved, they're getting approved at very, very punishing interest rates.
NORRIS: And that's the credit conundrum: Those who can least afford those high interest rates are the ones who are saddled with them.
Mr. ULZHEIMER: That is the credit conundrum and it's even worse for unsecured credit, like credit cards. For people who think that they're going to be applying for 10, 15 and $20,000 unsecured credit limits and carry this plastic around in their wallet, not with FICO 600 and not with FICO 650.
NORRIS: What's a perfect credit score? What's that shining number that everyone wants to work their way toward?
Mr. ULZHEIMER: Well, the FICO score range is 300 to 850. And the perfect score is almost like a unicorn: You got a lot of people talking about it but no one's really ever seen one. If you can boast scores in the 750-plus range, while that's not a technical perfect score, you are essentially immune from the credit crunch and you're being aggressively pursued by credit card issuers and anyone else who has money to lend because you are the flight to quality. You're the destination.
NORRIS: John, before I let you go, one last question. With so many people locked out of reasonable credit, is there some sort of sub-rosa economy where people are forced to use an alternative banking system, or an alternative credit system of some kind?
Mr. ULZHEIMER: Yeah, I think you also make a very good point and also a very disturbing point. The only environment that is excited about this new FICO score distribution is essentially that alternative environment. So pawnshops, title lenders, payday lenders.
These are the folks who target and fulfill the need of short term extraordinarily high interest types of loans for people who've got really, really poor credit and cannot get loans with more traditional Main Street types of lenders. So those folks are in for a very, very busy next few years.
NORRIS: John Ulzheimer, thanks so much.
Mr. ULZHEIMER: My pleasure, as always.
NORRIS: John Ulzheimer is the president of Credit Education at Credit.com.
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