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Consumers With Fair Credit Are Cutting Their Debt

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The recent financial downturn caused millions of consumers to significantly alter their attitudes toward borrowing in general, and many may have particularly focused their efforts on cutting credit card debt, which carried higher interest rates and was therefore generally more costly.

The amount of credit card debt being carried nationwide has fallen significantly in recent years, and most of this deleveraging was done by people whose credit ratings are considered to be just fair, according to new data from the credit scoring bureau FICO. While consumers with credit scores between 300 and 599, whose standings are considered quite poor, were most active in cutting their debts, those with scores ranging from 600 to 719 mostly did the same.

For instance, the average amount of debt reduction for borrowers with no major delinquencies on revolving accounts (typically credit cards) slipped some $900 between October 2010 and the same month last year, the report said. That came after an even larger reduction, of nearly $1,700 in the two-year period starting in October 2008. Meanwhile, while those with ratings of 660 to 719 slashed debt by close to $1,300 from October 2008 to 2010, they also cut out another $300 or so in the two years after that.

On the other hand, those with ratings of 720 to 799 added about $400 in debt in the most recent two-year period, after cutting only a little less than $100 prior to that, the report said. Further, those with scores ranging from 800 to the maximum of 850 added about $400 from October 2008 to 2010, and nearly another $1,000 in the two years following.

These changes came even as lenders significantly reduced credit limits for all borrowers during and immediately following the recession, the report said. Since that time, however, limits have once again begun to grow for all but those with the lowest ratings. For instance, those in the middle 20 percent of the credit score spectrum saw average limits slip nearly $6,000 from October 2008 to the same month two years later, but over the next 24 months, they’ve risen once again, by more than $2,000.

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Many consumers may have experienced significant economic hardships during the recession and are now working diligently to avoid taking on more debt than they can handle, as they might have in the run-up to the downturn.

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  • Annette

    As I pay off and close accounts, why is my credit score not getting higher.

    • Tara

      It’s not raising because you cannot close the accounts. If you close the accounts then your debt to credit ratio will actually increase because you won’t have as much credit available. Your best bet is to pay them off and leave them open that way the bad history can be replaced by good history. Also it will take at least a month before anything you do actually shows up on your credit report.

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