Credit Scores Drop, Spelling Trouble For Auto Loan Approvals

New figures released by FICO show that 25.5 percent of consumers are now considered a bad risk to lenders. Almost 43.4 million consumers now have a credit score of 599 or less, the Associated Press reports. This is bad news for car shoppers, since a score of 600 or lower will result in an auto loan with a high interest rate, if they even get approved at all.

FICO, which is the most widely used credit score model, reports that about 2.4 million more people dropped into the lowest credit score categories in the past two years. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, dropped below 599, the AP reports.

This data doesn’t mean car shoppers whose credit scores fall below 600 won’t get approved for a car loan. There are subprime lenders who only work with consumers with bad credit scores. But those who do get approved usually wind up with extremely high auto loan rates of 15 percent or higher, making the monthly payments very expensive and hard to afford.

FICO’s analysis also found an increase in the number of consumers who have a prime credit score of 800 or higher in recent years. These consumers now total 17.9 percent, which is higher than the historical average of 13 percent. These consumers are the car shoppers who can take advantage of low auto lease rates and 0 percent auto loans, which usually require about a 700 or higher to qualify.

FICO also saw a decline in the number of consumers with moderate credit (650 to 699). FICO’s data shows that this group totaled 11.9 percent of scores. Although this is down slightly from 12 percent in 2008, it is lower than the historical average of 15 percent. FICO said this group is important because it would probably feel the effects of lenders’ tighter credit standards the most. These consumers had no trouble getting approved for affordable credit in the past, but may now find it more difficult.

FICO’s data is based on consumer credit reports as of April 2010.