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HomeNewsConsumer Reports Money Adviser November Issue

Consumer Reports Money Adviser November Issue

Three strategies to combat declining credit scores

Consumer ReportsDue to the recession, consumer credit scores are declining, and since April 2008, approximately 1.2 million people have fallen out of the top credit-scoring tier of 800-850. Continuing unemployment, falling home values, shrunken investment portfolios, and excess borrowing have made debt repayment more difficult for many Americans.

“Banks tie borrowers loan qualifications and interest rates to credit scores, and many have reset their ‘subprime’ score thresholds to 660 from 600 before the recession,” said Noreen Perrotta, Editor, Consumer Reports Money Adviser.  “Declining scores are an unpleasant fact of life for many in this recession.”

Consumer Reports Money Adviser offers the following three strategies to help consumers fight back:

Shop harder for credit

One thing the recession hasn’t changed is consumer choice. You’re likely to find that your credit score will have a varying impact on the rates that different lenders might charge you, so it’s worth it to do some work to find the best deal. Big savings can be found by shopping around for the best rate on an auto loan. Car loans can be all over the board for the same credit score. Diligent shoppers can knock two to four percentage posts off the cost of an auto loan. That can be worth $890 to $1,780 over the 48-month term of a $20,000 loan. Shopping might also save you as much as one percentage point on an adjustable-rate or jumbo mortgage. That can be worth $113,000 over the 30-year life of a $500,000 mortgage.

Find cheaper insurance

Another possible cost of a declining credit score is higher auto and home insurance premiums. Most insurers now base a major part of their premium calculations on a consumer’s credit-based insurance score, a close cousin of the credit score. Almost all states allow that use.

The impact of a reduced insurance score varies because different insurers use different methods to calculate scores and convert them into premiums—all of which are kept secret from consumers. If your insurer hiked your rate because of your score, CRMA’s experts advise shopping for a lower premium somewhere else. Start by checking if your state insurance department provides rate comparisons by visiting www.naic.org/state_web_map.htm to find a link to your state’s agency. Also consider forming a relationship with an independent insurance agent, who can periodically check rates for a range of carriers.

Improve your score

There are steps you can take to improve your credit score and keep it from moving in the wrong direction including:

  • Fix errors.Your score can be hurt by inaccurate information on your credit reports. So regularly check them by requesting a free copy each year from each credit reporting bureau at www.annualcreditreport.com.
  • De-leverage. If you can manage it, paying down your credit balances is one of the most effective ways to improve your score. The reason is that less debt owed reduces your credit utilization—the amount of your total debt as a percentage of your available credit lines. The closer your revolving debt gets to your credit limits, the more your credit score suffers. So try to keep your credit card balances low.
  • Don’t close old credit accounts. It might be tempting to dump your credit-card company if it reduced your borrowing limit or slapped you with sky-high interest rates or unfair penalty fees. But closing a card account reduces your total credit line while the total debt on all your cards might remain the same. That increases your credit-utilization level, which depresses your score. If the account is old, closing it will also affect your score because a long credit history is a plus.

Get help sooner than later.If you’re struggling to keep your head above water, the sooner you get things back in order, the better. Your score will probably take a negative hit, but it will be temporary, and each passing month after that your score will gradually recover if you stay on the right track. A credit counselor can set you up with a five-year repayment plan with more favorable terms than you might be able to arrange on your own. Seek out reputable, nonprofit agencies that employ trained and certified counselors and members of the Association of Independent Consumer Credit Counseling Agencies (www.aiccca.org) or the National Foundation for Credit Counseling (www.nfcc.org.).

The full story is available at www.consumerreports.org/cro/money/credit-loan/credit-scores-dropping/overview/index.htm.

About the Consumer Reports Money Adviser

Consumer Reports Money Adviser is a monthly, subscription-only newsletter that answers tough money questions and provides expert financial advice. Its proven information and successful strategies can make any financial decision an easy one. Each month, CRMA provides feature articles and helpful investment, savings, and spending advice that will help prepare consumers for anything life may bring them. For more information visit: www.ConsumerReports.org.

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