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Good credit is key, especially in hard economic times

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MINNEAPOLIS — Americans’ credit scores, the three-digit number that determines whether you’ll get a loan and how much you’ll pay for it, have taken a beating.

Millions of consumers’ scores have dropped, making it more expensive for them to borrow money — or even impossible if the score has sunk low enough.

“You have to watch out for a vicious circle. Now you have a bad credit history, which makes it harder for you to recover,” said Evan Hendricks, a Washington-based expert and author on credit reports and scores.

The falling credit scores are a reflection of the times: plummeting home values, record foreclosures and the overall recession. At the same time, lenders are applying stricter standards to borrowers, including requiring higher credit scores.

“For better or worse, our economy is very dependent on consumer spending,” Hendricks said. “If tougher standards mean that people with good credit can’t get credit ... that could choke off the recovery or slow it down.”

Most Americans may not know their actual credit score, but they’ve seen enough marketing by the credit-score companies, including Fair Isaac Corp., to know that the number, which can range from 300 to a perfect 850, has become a de facto national ID. Lenders rely on Fair Isaac’s FICO score, but so do employers when screening job candidates, insurers when issuing policies for homes and autos, and landlords when renting an apartment.

And exactly what many people are experiencing now — foreclosures, late credit-card payments — will bring down their credit scores.

Americans carry $2.56 trillion in consumer debt, up 22 percent just since 2000, according to the Federal Reserve. The average household’s credit-card debt is $8,565, up almost 15 percent from 2000. And a report out last month said borrowers with good credit now make up the largest share of foreclosures.

“There’s no question a foreclosure can really slam your score,” Hendricks said. “It will easily send you into subprime territory.”

Overall, he said, two major factors are bringing down credit scores: late payments because of the economy and credit-card companies reducing credit limits, meaning people are using a greater percentage of their available credit.

Walking away from a house takes a toll on a foreclosed homeowner’s credit. But so do late payments — in particular those that are more than 90 days overdue. According to Fair Isaac, which created automatic credit scoring, bankruptcy, credit card defaults and foreclosures stay on a person’s credit report for seven years. That said, a single bad account such as a foreclosure would be better than a bankruptcy, which usually involves many defaulted accounts. But if all other bills remain current, Fair Isaac says a foreclosed homeowner’s score could begin to rebound in as little as two years.

Fair Isaac shies away from devising a rating system of what ranges are “good” and which are “bad,” saying each lender has its own standard. In general, a score of 700 or better is a sign the consumer handles credit well.

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