How Credit Scores Change Lives

credit scoreABC News Photo Illustration
Whether you have a high credit score like Mike Thompson, pictured, or lower scores like two other consumers who spoke to, chances are that this financial crisis has made borrowing harder for you.

In those halcyon days of easy credit, consumer credit scores were often an afterthought. Even borrowers with low scores could qualify for loans to buy what they wanted, when they wanted.

Now, with the worst financial crisis since the Great Depression battering the economy, being persnickety about scores is back in vogue, both for consumers and lenders.

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"Credit scores are more important now than they have been pretty much ever," said Emily Peters, a personal finance expert with the credit education and information Web site "What we're seeing now is that credit scores are being used the way they were intended, which is assessing risk and not giving credit to people who are below a certain score."

With this in mind, talked to three consumers with similar incomes but distinctly different credit scores to learn how their scores are affecting their lives.'s Peters also provided advice on what each consumer could do differently to meet their financial goals. Read on, some of her advice might just apply to you.

The Low Score

Consumer: Denise

Score: 498

The situation: Denise, 48, a married human resources specialist living in Missouri, said that her credit score plummeted after an illness left her husband out of work and the couple was unable to pay their bills.

Today, Denise is in better shape. Her husband is back at work as a manager at an airline, the couple is earning about $75,000 a year annually and they're usually on time with their bill payments.

But they're not out of debt. Denise has $3,000 in outstanding debt on two closed credit accounts that she's paying down through a collections agency. She also owes a total of about $500 on two credit cards that each have a limit of $300.

Her challenges: Denise's low credit score prevented her from securing an affordable rate on an auto loan; she got help from her mother, who co-signed the loan. Denise also can't get financing for purchases ranging from a $500 television to new windows for her home.

"My hands are tied," she said. "I know I have to save, save, save, if I want anything."

Super-Low Credit Score? How to Cope

The advice: It looks like Denise will have to keep saving. Peters says that nearly a third of your credit score is dependent on how much you owe, compared to how much you have the capacity to borrow -- your debt utilization. If Denise can reduce her credit card debt to below 10 percent of her credit limits -- in this case, below $60 -- it could have a significant impact on her credit score.

But right now, Peters said, what's dragging Denise's score down the most are her two "active collections accounts" -- the two outstanding credit card balances now in the hands of a collections agency. The good news here, Peters said, is that collections records expire after seven years, whether Denise repays the debts or not. Once the records expire, Denise could see her score jump about 100 points.

Until then, Peters said, Denise needs to continue making timely payments on her bills, including her auto loan. Any late payments could immediately damage not just her credit but her mother's credit too.

Overall, consumers with credit scores below 650 are going to have the most trouble securing loans, Peters said. Before the financial crisis, they could still qualify for subprime or high-interest rate loans.

Today, she said, they're in the "the no-go zone entirely."

For those who, in particular, have trouble qualifying for traditional credit cards, Peters advises applying for secured credit cards, which require a security deposit that can be used to compensate for a future default. The security deposit can be as low as $300 but there's a catch, your credit limit is only as high as your deposit.

On the upside, making timely payments for a year on such a card could help you improve your credit score.

"Depending on your financial situation, you could see a pretty dramatic increase," Peters said.

The Good-but-Not-Great Score

Consumer: Kerry

Score: Between 703 and 723.

The situation: Kerry, 59, is a disabled Vietnam veteran living on Florida's Gulf Coast. Between his government disability benefits and his wife's income as an insurance claim adjustor, they make about $80,000 a year. The couple has a number of debts: $6,500 spread over seven credit cards, $13,500 on two car loans and $180,500 on a 30-year-fixed mortgage. The couple's combined limit on their credit cards is just over $20,000.

Kerry's credit scores are 703, 721 and 723; his wife's scores are 665 and 699. Each of the three major credit-reporting agencies -- Equifax, Experian and TransUnion -- provided the couple with a different score, which is not unusual, Peters said. Differences in the financial data the agencies have on hand or differences in the formulas they use can result in varying scores.

While Kerry says he makes his bill payments on time, he suspects his debt is keeping his credit score from rising.

His challenge: Kerry wants to take advantage of today's lower mortgage rates by refinancing his mortgage from a 5.5 percent interest rate to 4.25 percent. The first lender he applied to rejected him.

"Our credit scores aren't terribly bad but, apparently, they weren't good enough," he said.

Now, Kerry is waiting to see if he'll have better luck with a different lender.

The advice: Kerry and his wife's scores may be above average -- TransUnion reports its average score is 651 -- but that doesn't make them ideal candidates for mortgage refinancing.

Generally, Peters said, you shouldn't refinance unless you stand to reduce your mortgage interest rate by two percentage points, your financial situation has improved or you have a balloon payment or mortgage rate adjustment -- on an adjustable rate mortgage -- looming.

Peters said that it's likely that more than just his debt level is keeping Kerry's score from rising. One 90-day late payment or a collections history, a short credit history -- as in, if a credit card account is less than two years old -- or just applying for too much new credit in a short period of time can lower your credit score.

Peters said that, like many other families, Kerry and his wife aren't "necessarily in danger or terribly over-extended, but also not in the best financial position."

As in Denise's case, Peters advises that Kerry work on reducing his credit card debt to less than 10 percent of his credit limits. He should also check his credit reports to discern and address what else may be bringing his score down.

Within three to six months, Peters said, Kerry may be able to raise his score enough to qualify for a better mortgage rate.

People with Kerry's score used to face far fewer challenges when it came to refinancing.

But right now, Peters said, it "isn't an easy time for people with less-than-perfect credit to qualify for any type of mortgage."

The High Score

Consumer: Mike Thompson

Score: 830

The situation:Unlike the two other consumers interviewed for this story, Mike Thompson allowed us to use his last name -- and why not? His high credit score is something many Americans would be proud of. A retired real estate agent living in southern Florida with his wife, Thompson said he pays his credit card bill in full every month. Between rental income and his wife's income, the couple makes about $75,000 a year.

His challenge: Thompson said he was shocked when his credit card company notified him that it would raise the interest rate on his card from below 10 percent to 18.9 percent. His efforts to have the hike reversed, he said, went nowhere.

"I said, obviously, with my credit score and financial condition, there must be a better rate," he said, "and the answer was 'no.'"

Since he pays his bill every month, the increase wouldn't affect him immediately. But if an emergency arose and Thompson were suddenly unable to pay the bill completely, that higher rate would hurt.

Ultimately, Thompson decided to apply for a new, lower-rate credit card with a different company and to cancel his old account.

The advice: Today, even customers with sterling credit scores aren't always getting sterling treatment from credit card companies. A score of above 800, Peters said, won't necessarily qualify you for the lowest rates.

Peters said that while Thompson seems to have managed his credit well overall, closing his original account was a rash decision. After a rate increase or credit limit cut, it may be tempting to close an account, she said, but that move ultimately reduces your available credit and rids you of an account that helped establish your credit history.

It's "a double whammy" that can result in a drop in Thompson's credit score, Peters said.

Opening the new account may also "ding" his score, but that damage, Peters said, will be temporary as long as Thompson continues to make his payments on time and uses up only a small portion of his credit limit.

Overall, Peters said, Thompson's score may drop 20 to 50 points -- but given how high his score is to begin with, it's a drop he can likely afford.