Although Equifax recently reported that fewer Americans are struggling with bad credit, 25.2% continue to try to bring their credit score back from the dead.
Last month Equifax found that the overall share of consumers with Equifax credit scores under 620 dropped by 0.7% going from 25.9% to 25.2%. Credit scores beneath 620 are considered to be subprime.
Some areas of the country are doing better than others. For example, Chicago is seeing the widest decline in subprime borrowers, whereas Houston experienced an increase in those with a credit score of 620 or less. Plenty of factors come into play including job market and demographic variations.
“Consumer credit scores are improving in most major metropolitan areas,” Trey Loughran, president of the Personal Solutions division at Equifax told The Sacramento Observer. “The job market is improving and time is starting to heal the wounds of the Great Recession.”
Committing Credit Score Homicide
Many economists point to the housing market downfall as the main culprit, however numerous elements are culpable as well:
- Late credit card payments: Even a one late can put a dent in your credit, explains Barry Paperno, consumer operations manager at FICO to CNN Money. “This continues to be the number one reason scores are lower," he said. "In addition to being a heavily weighted part of your score, if you're late on a payment, it's going to continue to appear on your credit report for about seven years."
- Not paying down your balance: Carrying your credit card balance over from month to month causes you to pay mounting interest and also can have a negative impact on your credit score. "The best thing to do is pay your bills on time and pay as much of the balance as possible to try to keep your debt utilization ratio down and raise your credit score," said Bill Hardekopf of Lowcards.com to CNN Money.
- Opening and closing credit lines. Closing credit lines can negatively influence your debt to utilization ratio, Hardekopf says. At the same time, credit score points fall when the borrower first opens a new credit line because the borrower is considered to be higher risk. Why? When the borrower opens a new line the credit card company has to perform a credit check, which can have a negative impact on your score. However, this impact is only temporary. "You can look at it as a long-term strategy and go in with the idea that you might lose a few points now but in the long run you might be better off because you'll have more credit available," Paperno said.
Of course defaulting on any loan will tank your credit score so not overextending yourself and being sure you can afford what you purchase is imperative.
How a Credit Union Can Help
If you are a borrower who continues to struggle with trying to improve your score, there is hope. Credit unions across the country offer a menu of products and services that can get you back on the right track.
- Obtain a secured loan: Susan Tiffany, the director of consumer publications for the Credit Union National Association (CUNA) says that credit unions are an ideal place for a secured loan because credit unions are more likely to look beyond just a score. "(Credit unions) don't treat credit scores as the only source of information about you," she told MSN Money. "They're looking for ways to say yes. Are you responsible with your checking account? Are you demonstrating that you're trying to be a regular saver? Those behaviors can help."
Obtaining a secured loan can help your score because the FICO model looks at borrower behaviors in terms of how credit is managed.
Digital Credit Union ($4 billion, Marlborough, MA) offers a Credit Builder Loan where the amount the member borrows is transferred to a DCU savings account. The member makes regular payments, which establishes a positive credit history. Once the loan is paid off the member has access to the full balance in the savings account, plus dividends.
- Co-sign on a loan. Not in the market for a loan (or can’t get one)? Consider co-signing for a credit union loan, as long as you truly trust the borrower. There is some risk to your credit because if the borrower doesn’t pay, you are on the hook for the amount.
- Open a credit union “fresh start” account. Many credit unions offer a credit building checking account that not only helps rebuild credit, but many have a savings component. Plus most credit unions won’t charge exorbitant (or any) fees to maintain the account.
For example, Austin Telco Federal Credit Union ($1.2 billion, Austin, TX) offers Fresh Start Checking that includes the benefits of a free checking account, plus a Visa Check Card. Other credit unions, like Neighborhood Credit Union ($300 million, Dallas, TX) has an educational component that provides seminars on how to manage credit.