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Credit scores strong in financially distressed America

By Leslie McFadden ·
Thursday, May 27, 2010
Posted: 3 pm ET

Yesterday, the Consumer Credit Counseling Service of Greater Atlanta, which has renamed itself CredAbility, released a new quarterly index that measures the financial health of the average American over time. The index uses a 100-point scale where anything below 70 indicates financial distress. The methodology is proprietary, but CredAbility uses data from public and government sources a well as its own research in these five areas: employment, housing, credit scores, household budget and net worth.

Americans haven't had an average score higher than 70 in seven consecutive months, which means that consumers remain financially distressed. Financial health sunk to its lowest point in the last four years at the close of 2009, but improved slightly in the first quarter of 2010, when the average score rose to 64.2 from 63.9. Areas that showed improvement include household budgets, net worth and employment.

Consumers were most financially secure the same year the recession officially began. In the first quarter of 2007, the average score reached 78.7.

Surprisingly, the only financial category that didn't change much was credit scores, which have remained relatively flat in the low 80s and upper 70s for the past four years.

Michelle Jones, the senior vice president of counseling at CredAbility, explained to me yesterday that part of the reason for the stability of credit scores was because people have become better at managing their credit, even to the point of not making smart financial decisions in some cases to protect their credit score.

One example of this misplaced priority is when people  need credit counseling help but avoid it for fear of damaging their credit rating.

How does credit counseling affect credit score?

Simply talking with a credit counselor will not impact your score, Jones stressed. Credit counseling agencies do not report to the credit bureaus.

Participating in a debt management plan, or DMP, won't have a direct impact on your score. When creditors are contacted by the agency to negotiate a lower interest rate and fees, they may report to the credit bureaus that you are working with a credit counseling agency. Such a notation will have zero impact on your FICO score, according to the firm that developed the leading credit score. What can hurt the score is if the creditor reports that you aren't paying the account as originally agreed. In addition, the closure of open lines of credit while on a DMP can hurt the score because it reduces your available credit. Less available credit can push your debt-to-credit limit ratio higher.

Of course, if you're already maxing out credit cards or missing payments, chances are your score has already suffered. A single 30-day late payment can knock a 780 FICO score down 90 to 110 points. Paying down balances will lift the score over time.

Working with a legitimate counseling agency to reduce your credit card debt shouldn't be expensive. The National Foundation for Credit Counseling cautions that any set-up fees or monthly fees shouldn't top $50, and monthly fees should be in the $25 range.

Bankrate offers more tips on how to choose a debt counselor.

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