Monday, July 12, 2010

Falling FICO Scores Reveal Real Economic Picture

A new report issued by FICO, the company that compiles the eponymous credit scores that determine whether consumers can borrow money, and at what rate, has released a report that says that FICO scores for more and more Americans are falling:

As the U.S. economy struggles to recover and unemployment rates remain high, Americans may have another issue to worry about before they can improve their personal financial situation - their credit scores. A new report - released by FICO - reveals that Americans' credit scores have dropped to a new low, endangering consumers' ability to secure loans and competitive rates for home and auto loans as well as credit cards.

Citing data from FICO, the Associated Press reports that 25.5 percent of American consumers - which roughly translates to 43.4 million individuals - carry a FICO credit score of 599 or below. The FICO credit model measures the financial strength of an individual and assigns them a three-digit number between 300 and 850 based on their credit health. According to the model, a rating of 599 or below is considered "bad credit."

Given the current state of the economy, this cannot be surprising. With so many people out of work, and with unemployment benefits lapsing, increasing numbers of consumers simply don't have the money to pay the large debts that they raked up during seemingly better times. This effect is augmented by the fact that a few late payments on a credit card account can send your overall FICO score into a freefall. This in turn causes your other creditors to raise your interest rates, thus increasing your monthly obligations. For the financially strapped, one late payment can begin a financial cascade that leads to defaults.

But the more interesting point about the falling FICO scores is that it points up just how false the image of American prosperity has been for the last decade or so.

Heavy reliance on credit prior to the economic collapse is considered one reason for sinking credit scores. Following the subprime mortgage and employment crisis, many Americans found themselves unable to meet their financial obligations, forcing them to default on mortgage and auto loans and begin a dangerous cycle of credit card debt.

In short, the "economic expansion" that occurred betweeen 2002-2007 wasn't an expansion at all - it was largely an easy credit-driven borrowing and spending spree in which American consumers went deep into debt to pay for things they couldn't really afford.

Now that the credit bubble has burst Americans are left with the ruins of their party. The lack of jobs is the result of exporting quality manufacturing jobs (the engine of wealth creation) while importing lots of cheap, unskilled labor from low IQ populations (like Mexico). The loss of manufacturing has enriched our enemies (China) and undermined America's economic viability. While the importation of a new population - as concocted by our elites - has saddled the country with a vibrant underclass of people who suck up low level jobs and burden social service agencies, costing the taxpayers much more than they will ever return to government coffers.

And Washington's reaction to this? 1) Export more jobs. 2) Borrow billions more to pay for stimulus that hasn't worked. 3) Borrow even more to pay for wars in distant lands. 4) Concoct schemes to legalize the millions of illegal low IQ immigrants that federal laxity has already let into the country. Truly, a battleplan for excellence.


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