Credit Scores Dip to New Lows: Should You Worry About Your Number?

(MoneyWatch)  More Americans are seeing their credit scores fall to new lows, according to figures from FICO Inc., the leading credit scoring firm, reported this morning by AP. Roughly 1 in 4 consumers (25.5 percent) now have scores below 600; that's about twice the typical amount at that bottom rung. Translation: There are nearly 43.3 million people who can't get car loans, mortgages, or credit cards under the tighter lending standards prevalent now at most banks.

No wonder the economic recovery seems stalled. Consumers who can't borrow money can't really buy much, especially in those key credit-supported sectors like housing, cars, home improvements, and big durable goods.

That's the macro view. The micro view is, you yourself may not be doing so badly. More people (17.9 percent) also have the top 800+ scores, said the report. That's well above the historical average of 13 percent for those with the best scores.

So, where do you stand and what should you do about it? Some thoughts about those credit scores.

• You probably already have a good idea of your score. Credit scores are a proprietary "black box" that lenders use to gauge your credit worthiness. But they really aren't that mysterious. If you're behind on your bills, using one credit card to pay another, and maxed out on all your available loans, you probably have a lousy credit score. On the other hand, if you have a clean record of paying bills and have plenty of unused credit available on your credit cards and home equity line, your credit score is probably good. On the margin, activities like applying for new cards and closing old ones can hurt your score, but that's only on the margin.

• You may not need to sweat it. If you're not planning any major borrowing -- such as a car loan or a mortgage -- within the next year, and you've not had trouble getting credit before, you probably don't need to worry about your specific credit score. Just keep paying bills on time and limiting card applications to a minimum, and your number will take care of itself. Don't believe me? I have two mortgages, a home equity line, a car loan, and several credit cards, all at great low rates. And I've never even seen my FICO score.

• Prepare for big loans. If you do think you're less than a year from borrowing big, it makes sense to find out your score and improve it, if necessary. Unfortunately, you cannot get your FICO score for free, and that's the original credit score that most lenders still use. But you can buy it for $16 at MyFico.com. There are also other non-FICO scores that give you a good idea of how you're doing. For example, you can get a free score at CreditKarma, and use it to monitor your progress. You can also use the free FICO-supplied credit score estimator on Bankrate.com.

• Clean it up, the safe way. If your credit score isn't good (and these days, "good" really means 690+), first get free copies of your credit reports from all three monitoring agencies (at the one legit place for that, AnnualCreditReport.com) and check to make sure that they don't contain any errors. If they do, follow the credit reporting bureau's procedures for fixing them. Then work on improving your credit score: Pay down credit card balances so that you have unused credit available. Make every payment on time. Keep all of your existing card accounts open and active, by using them all, at least occasionally. And don't apply for any new credit cards or minor loans (like a store loan for a lawnmower or refrigerator) in the months leading up to your mortgage or car loan request. Finally, don't waste time and money paying any company that claims it can clean up your credit in a hurry. They're either doing the same things you can do yourself, or not doing anything at all -- except billing your credit card.

Photo by TheTruthAboutCreditCards.com
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