BySARAH MORGAN
The gap between the haves and have-nots seems to be hitting credit scores. The number of people with credit scores below 599 or above 800 is growing, according to a recent AP report based on FICO data.
Given the depth of this recession, credit industry analysts say it s not surprising that the number of people with scores below 599 has grown from a historical norm of 15% to 25.5%. There s still a phenomenon of the rich getting richer and the poor getting poorer as a result of the recession, says Ben Woolsey, a spokesman for CreditCards.com. People who were already struggling financially may have been pushed over the edge by the loss of a job or other hardship, he says.
Paying down debt has likely helped some consumers climb to the top of the credit marketplace, says Ken Paterson, the director of the credit advisory service at the Mercator Advisory Group, a consulting firm serving the banking and payments industries. Consumers growing familiarity with how credit scores are calculated and how they can be improved also means that people who are motivated and don t have any financial difficulty can do a better job of improving their score, Paterson says.
The polarization seen in this FICO data may not be surprising, but how will lenders respond? Here s a look at what growth at the top and bottom ends of the credit spectrum might mean for consumers:
People With Poor Credit
Consumers in that bottom tier of the credit-score landscape will have trouble getting credit at all or will be charged very high interest rates and fees. Credit-card issuers are still struggling to recover from the recession-driven spike in charge-offs and delinquencies, and are also assimilating new regulation into their business models, Paterson says. Many of the major issuers have moved away from serving the subprime segments and left that to a smaller number of specialist organizations, he says. Industrywide, the number of credit-card offers sent to U.S. households grew 45% in the first five months of the year compared with 2009, but the percentage of those offers sent to individuals with FICO scores less than 660 has fallen from 20% in the third quarter of 2007 to just 4% in the first quarter of this year, according to data provided by Synovate Mail Monitor.
Secured cards are one option for consumers with poor credit. Getting a card like this is like renting an apartment, says Odysseas Papadimitriou, the CEO of CardHub.com. The consumer puts down a deposit which they will get back when they close the account, but continues making monthly payments as with an unsecured card. Consumers typically can add to their deposit and increase their credit limit over time, Papadimitriou says.
When activity on these cards is reported to credit bureaus, they look just like unsecured cards, so they re an excellent option for those attempting to rebuild good credit after financial difficulty, Papadimitriou says. Consumers should call the issuer to confirm that the card does report to credit bureaus, says Beverly Blair Herzog, a spokeswoman for CardRatings.com.
People with credit scores between about 650 and 699 are feeling the effects of tighter lending standards the most, Herzog says. Particularly if growth is concentrated at the top and bottom of the market, consumers in this middle segment may see fewer offers, Papadimitriou says.
Because card issuers are still figuring out how to price for risk in this new environment, the credit card landscape is likely to be in flux for about a year to 18 months, Paterson says. All consumers, but particularly those with less-than-stellar credit, should keep monitoring new credit-card offers over the next year or so because pricing is likely to keep changing, he says.
See our tips for improving your credit score
People With Excellent Credit
Here s the good news. That strong uptick in the number of direct-mail credit-card offers in the first five months of this year stems almost entirely from more competition for consumers with excellent credit. Those with credit scores above 720 received 80% of offers in the first quarter of this year, up from just 56% in the third quarter of 2007, according to Synovate Mail Monitor. In the past, people that paid their bills on time in the industry were even called deadbeats, Herzog says. Now issuers are seeking out those consumers who use credit responsibly.
Competition for these consumers will be fierce and will continue to center around rewards, Papadimitriou says. The recently introduced Capital One Venture Rewards Credit Card, for example, is a miles-based rewards card with a liberal policy for redeeming points that essentially works like a cash-back card, Papadimitriou says. More innovative rewards offers should be on the way, he says.
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