By: John W. Schoen
Among the many legacies of the housing bust is a widespread collapse of consumer credit. In the space of a few years, bankers have gone from lending to anyone with a pulse to demanding a pristine payment history.
The result is a collapse in consumer credit that shows no signs of easing. In September, the latest figures available, revolving consumer credit fell at an annualized rate of 13.3 percent.
The situation is worsening. In the first half of the year consumer credit was dropping at a rate of just under 10 percent.
No one is suggesting we go back to the reckless days of setting up tables at college orientations to hand out credit lines to freshmen. The credit card industry learned the hard way that when their models break, the results can be painful for all concerned.
But the lending spree has destroyed the credit histories of millions of Americans.
The rules of the consumer credit game suggest it will be years before those failed borrowers are able to dig themselves out of the hole. Until those households get access to credit again, our consumer-driven economy will continue to slog along in low gear.
In the meantime, there are steps consumers can take to get back in the good graces of the financial services industry that helped put them in a hole they find themselves in.
"I am trying to build credit for myself and husband. I have a low credit score, and he has none. We bought a truck and it's under both names, so we are hoping after we pay it off it will help with our credit. He has a repo under his belt and I have a couple of phone bills that I let get too high and couldn't pay them off. So my question is, what can we both do to build and increase our credit scores? We want to buy a house in the future and would like to build our credit so it won't be so hard on us. Any information or ideas that could help?
— Crystal, Amarillo, Texas
There are lots of reasons for financial setbacks, some of which you can’t control. With the “real” unemployment rate pushing 20 percent, job loss is a big one. Health setbacks are another; nearly two out of three personal bankruptcies were the result of out-of-control medical bills.
Letting the phone bill “get too high,” on the other hand, isn’t on the list of uncontrollable setbacks. You can fix that right away.
But it will take more than a few months of prompt payments to get back on track. The formula created for scoring credit doesn’t care why your payment history faltered. Maybe you're one of those people who just can't stick to a budget. Or maybe you happened to have hit a period of bad luck.
The credit algorithm can’t handle that distinction. That’s a pretty big flaw in the “science” of calculating credit ratings.
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