Financial Answers

Everyone seems to be feeling the effects of this “recession” that we have been in for the last couples of years.  Almost everyone I talk with knows someone who is in foreclosure, getting close to foreclosure or knows someone who has had their house in foreclosure. It has an appearance of an epidemic. I just read where the experts were predicting another one million foreclosures will happen in 2010 alone.  We are definitely in a real mess in the United States.

What I haven’t been hearing is what has been happening to everyone’s credit scores. Everything we do in this country, when it comes to finances, is based on credit and credit scores.  I decided to check this out and I don’t like what I found.

Credit Scores and You

Unless you are going to buy a house or a car, a major purchase, you usually don’t pay attention to your credit score.  Sure you probably had a few late payments to your credit cards or maybe missed a mortgage payment or two or were late on a car payment but you never really paid attention to what affect that had on your credit score.  It just didn’t seem to matter.

Things are starting to change.  It seems that about 26% of consumers-which is nearly 44 million people-have slipped into a credit score which is considered unacceptable by the current credit rating agencies.

The most commonly used credit rating system-used by most banks-is called the FICO system.  This is an acronym for Fair Isaac Company which was started in 1956 by Bill Fair, an engineer, and Earl Isaac, a mathematician.  If you want more history on this go to Wikipedia.org or Google it on the Internet.

FICO’s recent reports are showing a downward trend in people’s credit scores which is creating an ongoing and long term borrowing problem for millions of people.  Something needs to be done to address this problem otherwise it will add to the already depressed economy and continue to be a drag on the economy.  Banks will have another excuse not to lend to anyone.  This is not a good situation.

Credit Scores and their Relevance to You

Credit scores have been an important part of everyone’s lives for a long time now.  With that said it is about time that they are used correctly.  Think about this.  If you have a credit score, and I am using arbitrary numbers for this example, of 699 and you get turned down for a lower mortgage rate you have to wonder why.  You have done nothing wrong but you needed a 700 score to save a half-percentage point on your mortgage interest rate.  That half percent saving is significant in what you would pay over the life of a 30 year mortgage.

The problem lies in not having a “real” person look at your credit report but rather just a computer.  Your score may have been recently lowered to 699 because you took out a car loan.  Your lower score doesn’t necessarily indicate that you are a potential credit risk but the computer doesn’t know that.  This is what needs to be fixed.  Your “real circumstances” need to be taken into consideration not just some computer generated credit score.  If you feel this has happened to you talk to your bank and ask for a personal review of your credit. 

Because of all of the economic problems so many people are experiencing your credit score should not be the sole deciding factor in whether or not you get financing.  Be proactive!

Here are the three largest credit reporting agencies in the United States:

• Equifax
• Experian
• TransUnion

Remember, you are entitled to a free credit report so why pay for it?

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