25% of Americans Now Have a Credit Score of Less Than 600

According to the Wall Street Journal (link below), the "Great Recession" predictably lowered the credit score of the average American due to increased defaults.

According to the WSJ, 25% of all Americans now have a FICO score of 599 or less. This compares to 15% prior to the "Great Recession" getting under way in December of 2007.

On the other hand, not that many Americans who were in the top two most-creditworthy categories (700-749 and 750-850) prior to the "Great Recession" have dropped into the lower three levels. Prior to December 2007, approximately 59% of all Americans had a FICO score of 700 or higher - 2 1/2 years later, and this number has only dropped to around 56-57%.

The takeaway? Americans with higher credit scores defaulted on their debt obligations in much lower numbers compared to those with lower credit scores - no surprise there.

The explosion of Americans with a credit score of less than 600 can come as no surprise.

Many Americans survived on credit in the years leading up to the "Great Recession". Many people bought cars and homes that they couldn't afford, due to the availability of easy credit. Many lenders went out of their ways to accommodate people with low credit scores, even going so far as to invent new credit instruments that had the sole purpose of getting people with lower credit into loans that they couldn't afford. So, it can't be much of a surprise that many of these people defaulted on their loans when the economy started to go south, as they couldn't afford the loans in the first place.

In addition, the national unemployment rate has soared over the past 2 1/2 years. Many of the people in the lower half of the FICO score chart didn't have much in the way of savings before the recession started, so they quickly found themselves defaulting on their debt obligations if they found themselves out of work for any extended period of time.

A default will obviously hurt your credit score, which is why many Americans have a significantly lower FICO score now compared to the end of 2007.

As the WSJ points out, those with lower credit scores will find it much harder to borrow, especially considering the fact that credit markets have tightened up so much over the past couple of years.

At this point, that's probably not a bad thing.

Source: WSJ.com - Number of the Week: Default Repercussions

Filed under: The Economic Meltdown