The Corporation for Enterprise Development (CFED) released a report recently titled 2015 Assets & Opportunity Scorecard that claims “the economic recovery is bypassing millions of Americans.” Their research offers some shocking statistics that contradict the more optimistic reports of economic improvement that we more commonly hear these days.
The CFED reports that 20% of households rely on “fringe financial services” to get by – these include payday loans, title loans and other quick fix high-interest sources of cash. And the non-profit also estimates that 55.6% of American consumers have subprime credit scores which prevent them from accessing mainstream and more affordable financial solutions. A credit score of 640 or less is considered subprime to most lenders and credit issuers. Among these credit-impaired households, there is also a greater likelihood of being unbanked (i.e. lacking a traditional bank account).
Those most likely to fall in the subprime credit category and not enjoy the benefits of economic recovery are in the South and Southwest, younger and, more often, minorities including African-Americans, Latinos, and Native Americans. Another factor cited by the CFED in low credit scores and lower economic recovery is unemployment issues. While it is true that the overall unemployment rate has dropped drastically since the recession and has dropped another 1.1% in the past year alone down to 6.5%. However, the underemployment rate is still roughly 12.5%.
Underemployment is a serious concern – defined as those that want or need a full-time job that cannot obtain one. Those that are underemployed have moved off of the unemployment rosters, so the job market seems much improved. But part-time jobs rarely allow workers to achieve financial stability, and so the “improving” job market reports are misleading. Inability to meet costs of living leads inevitably to credit score declines. And with student loan defaults up to 14% according to the CFED, that’s another big hit on the FICO score of many Americans.
But there are things to be done to combat financial and credit problems and leverage the economic recovery that’s increasingly available to most. First, for those with student loans, taking advantage of affordable repayment plans like Income Based Repayment can get your loans out of default. IBR slashes payments to 10% of disposable monthly income (this can be as low as $0 a month regardless of your loan balance). Getting student loans out of default can add double digit points to your credit score in a very short amount of time and keep your college debt from tanking your score ever again.
Second, if you’re overwhelmed with credit card bills, card issuers have closed your accounts, and you have significant medical bills and other unsecured debts you can’t afford, Chapter 7 bankruptcy can offer a clean slate. This is a drastic step, but for those whose finances collapsed as a result of unemployment or temporary disability, it can be a fit solution particularly if you could otherwise pay your living costs if delinquencies and collection accounts were not a factor. Filing Chapter 7 will drop your credit score in the short term but will rebound as long as you take on new credit responsibly.
Third, if you can get your student loans under control and aren’t so deep in debt that bankruptcy is practicable, the next phase is to work out payment arrangements. Paying off highest interest credit cards first and using any cash windfalls (like a tax refund) to negotiate lump sum payoffs of other bills can get you out of debt for less and faster than continuing as you are. Finally, be sure to pull your credit report and look for errors. If you notice discrepancies and dispute errors on your credit report, that alone can significantly boost your credit score.
Rehabilitating your credit score can allow you to get lower rates on car insurance, lower interest credit cards, purchase a home or refinance your existing home loan at a more favorable rate. Reducing your costs of living helps your money go farther, improves your ability to save and allows you to truly participate in America’s burgeoning economic recovery.
