Credit Scores.

I saw this over at 24/7 Wall Street. {Excerpt with my comments at the end.}

American Credit Scores Crash To New Lows

“Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use,” according to the AP. ...The recession, tight lending practices by banks, and unemployment have caught up to the consumer credit market, and the trend is likely to worsen.

Banks, particularly regional and community financial firms, are struggling with defaults on both residential and commercial mortgages. To stay out of the clutches of the FDIC, they have become remarkably cautious about lending, even to people with good credit scores. The number of people who have been unemployed for over six months is now in the millions and nearly 25 million Americans are out of work. This population is not likely to see their credit scores repaired for years.

The young, for years targets for credit card companies, are unemployed at higher rates than people over 25. That means that this “feeder” population for credit cards is falling and some of these people now have no credit scores at all. Another trend that has hurt credit scores immensely is the disappearance of home equity loans which were once taken out by huge numbers of Americans who had houses worth more than their mortgages. Now, more than 11 million mortgages in the US are underwater. People are abandoning homes that are being foreclosed upon. Either of those actions severely damages credit ratings.

One of the long-term effects of low credit scores is a likely long-term drop in consumer spending. People often cannot afford to buy things by paying cash. And austerity is the rule of the day.

Douglas A. McIntyre

Link: Credit Scores.

My comment: I've long thought that this recession which is similar to the one we experienced in the early 1980's is a great re-ordering of things. One of my main thesis is that this recession is rapidly dividing the country even more into "have's" and "have nots". By this I'll reiterate what I've stated as a thesis before that for the top 60% of income workers {households making in excess of $60,000 per year and including younger people on some sort of age wage adjustment} the recession is over. By this I mean in general that for the above mentioned cadre, if they've survived this far then they are feeling better about their job prospects and have started to spend money again. That spending may be truncated by debt and a less optimistic longer term view but they are spending discretionary income again at this time.

For the bottom 40%, households primarily with lower job skills and lower education prospects, the country is in a depression. These are the people most impacted by what we read above. For that group things are not getting better soon.