Poor Economy is Hitting Credit Scores Hard
I’m sure this will come as a surprise to no one, but as consumers struggle to pay their bills, credit scores are getting hit pretty hard. According to TransUnion, one of the major credit rating bureaus, the average consumer credit score is 651.
That score represents a 6 point drop on average from the third quarter of 2008. That is a pretty dramatic decline in a relatively short period of time. Some states have been hit quite a bit harder than others. For example, California saw a 10 point drop and Arizona’s average credit rating fell 11 points.
It’s pretty obvious that the recession is at the heart of the declining credit scores. With unemployment at a 25 year high and record credit card defaults, this trend is expected to continue and perhaps get even worse.
An astounding 200 million people in the United States have credit scores so seeing a decline of just one or two points is a rather significant indication that consumers are struggling.
Unemployment, the collapse of the housing market and record high credit card debt are all wreaking havoc on the nation’s collective credit scores. Credit card delinquencies have reached a record high of 6.5% as banks and credit card issuers scramble to close accounts and lower credit limits in an attempt to mitigate risk.
The wave of foreclosures, or should I say tsunami, are also taking a toll on credit ratings. It is not as profound as the effect that credit cards have because many more people have credit cards than mortgages, but it certainly adds to the problem.
Another factor that affects credit scores is the consumer’s credit to debt ratio. As credit card accounts are closed and credit limits are lowered, credit scores take a hit.
Only time will tell how much worse this is going to get and when we can expect to see it begin to turn around again.
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