"Usually they have what I'd call an average credit score—in the mid 500s or 600s—but not a high credit score."
But hold on a minute! The credit bureaus say that the average credit score in the U.S. is 692. (In case you didn't know, FICO scores range from 300-850, although other credit bureaus use different scales.) In fact, Fair Isaac says on their Web site (myfico.com):
"About 40% of credit card holders carry a balance of less than $1,000. About 15% are far less conservative in their use of credit cards and have total card balances in excess of $10,000. When we look at the total of all credit obligations combined (except mortgage loans), 48% of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit, and loans-everything but mortgages. Nearly 37% carry more than $10,000 of non-mortgage-related debt as reported to the credit bureaus. " They report that 58% of consumers have a credit score of 700 or more.
Yet the data from Federal Reserve says something very different:
"The average household has $11,000 to $12,000 in credit card debt... Those figures are diluted by those who don't hold any debt. Households that carry debt from month to month carry close to $17,000 of unsecured debt on average. One out of every five households is either behind on payments or over the limit on at least one account."To make matters worse, not only is the rate of foreclosures at an all-time high, but it is projected that 10% of home owners (approximately 8.8 million people) will have negative equity by month's end.
Hmm. According to the bureaus, 30% of your score is determined by your debt ratio: how much money you owe, divided by the amount of available credit you have. Thirty-five percent of your score is based on payment history. In total, that's 65% of your score - and the data shows that the majority of American households are not doing so well in these two areas.
Now factor in the sneaky credit industry tricks -- universal default (where credit card issuers can raise your interest rates should your credit falter - even if you have never made a late payment), interest rate increases for no reason, not reporting your true credit limit on cards, "chasing balances" (where credit card companies reduce your credit limit as you pay down the card) -- and it's clear that the average consumer's credit score is being attacked from so many angles that an "average" credit score of nearly 700 is improbable.
Ask any residential mortgage broker or loan officer if their average applicant's credit score is 692. Just be prepared for the snickers or guffaws.
My business partner was speaking with a mother of three the other day. As she was talking about her credit, her demeanor completely changed - her shoulders slumped forward, head hung low, voice full of apology. She truly believed that she "deserved" to pay higher interest rates because of her "poor credit." Yet if she knew that the majority of people had credit scores in the same range as hers, would she be so accepting?
