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Signs of economic improvement are hard to see in a time of high unemployment, foreclosures and bankruptcy filings. But statisticians can see those signs in our improving credit scores.

Between April 2010 and April 2011, the FICO credit scores of 49 million Americans rose by 20 or more points, according to a study by Fair Isaac, the company that created the scores. That outnumbered the 40 million whose scores dropped by 20 points or more during the same 12 months, said Rachel Bell, FICO's senior director of global scoring services, including 15 million whose scores dropped by at least 50 points.

It was a very different story during the peak of the recession, when more people lost ground than gained it. In 2008-09, the scores of 50 million people declined by more than 20 points. Nearly 21 million saw their scores fall by more than 50 points. The scores of 44 million gained 20 or more points during the same period.


In fact, what happened to credit scores during the recession was a lot like what happens when you step down on a water balloon. What had been massed in the middle was pushed out to both ends.

The bell-shaped curve of FICO scores, where most people are massed in the middle, flattened a bit in 2008-09 as financial setbacks pushed many people down from the middle range (FICOs of 600 to 749) to the lowest range (300 to 499).

But there was also an increase in the highest-scoring brackets (800 to 850). FICO researchers believe folks in this group paid down their credit card balances and applied for fewer new accounts, two factors that can boost FICO scores.

Liz Weston

"The people who could started to retrench," Bell said. "They saved more and spent less."

Today, the top-scoring group is slightly smaller: 36.2 million people, compared with 37.4 million in 2008-09. But the bottom-scoring group is also smaller, by 2 million people, and about 2.8 million people are now scoring in the 550 to 640 range.

Percentage of population with credit scores*
FICO 8 score2005200820092011
300-499 6.6% 7.2% 7.3% 6.3%
500-549 8.0% 8.2% 8.7% 8.7%
550-599 9.0% 8.7% 9.1% 9.9%
600-649 10.2% 9.6% 9.5% 9.8%
650-699 12.8% 12.0% 11.9% 12.1%
700-749 16.4% 16.0% 15.9% 15.5%
750-799 20.1% 19.6% 19.4% 19.6%
800-850 16.9% 18.7% 18.2% 18.1%
*Fair Isaac estimates about 200 million Americans have enough information in their credit reports to generate credit scores.
Source: FICO

Clearly, bad things are still happening to people. They're losing their jobs, falling behind on their bills, losing their homes and filing for bankruptcy. Missing a single payment on a loan or credit card can shave up to 110 points off good credit scores, while a foreclosure or bankruptcy can cost hundreds of points.

But consumer spending and debt levels are also on the rise, indicating that some folks, at least, think the worst may be over.

Others are benefiting from the simple passage of time. Complete recovery from a foreclosure can take three to seven years. Total recovery from bankruptcy can take even longer. But the impact of any negative mark starts to fade over time, assuming you can pay your bills going forward.

If your credit scores were squashed by the recession, consider taking the following steps to join those whose scores are on the rise:

  • Know what your credit scores are. You can get credit scores for free from sites such as Credit Karma or Quizzle, or by signing up for credit monitoring. Typically, though, the scores you're seeing aren't the FICO scores that lenders use. Neither are the scores sold by the credit bureaus. If you want to see your FICO scores, you'll usually need to buy them from myFICO for $19.95 each.
  • Learn about how credit scores work. The days are long past when you could ignore these three-digit numbers. Your credit scores affect whether you get credit and how much you pay for it, but they can also determine what you pay for insurance and whether a landlord is willing to rent you an apartment. To improve your scores, you need to have and use credit accounts responsibly. Tactics like using cash only or applying for a bunch of accounts at once can set back your efforts to rehabilitate your scores. My book "Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future" explains in detail how modern credit scoring works, how the recession affected the credit market and what you need to know to boost your scores.
  • Review your credit reports. Serious errors, such as accounts showing late payments when you paid on time or accounts that aren't yours, can depress your credit scores. Disputing erroneous items so they're removed from your credit reports can instantly boost your numbers. But don't bother writing those 100-word statements explaining any legitimate negative marks -- credit-scoring formulas can't read, so it's pretty much a wasted effort.
  • Pay down your credit card bills. The FICO formula reacts strongly to the gap between the credit you use and the credit you have available. Widening that gap can help your scores. Ideally, you should use credit cards lightly and pay the balances in full every month. You want to use 30% or less of your credit limits at any given time; 10% or less is even better.

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  • Use a smart credit strategy. If you don't have a credit card, consider applying for a secured card to help rebuild your scores. (With a secured card, you make a cash deposit of $200 to $1,000 with the issuing bank, which gives you a card with a similar limit.) Likewise, if you don't have any installment loans on your credit reports (such as a mortgage, student, auto or personal loan), adding one to the mix can help. But apply for credit sparingly, as trying to open multiple accounts in a short time can wound your scores.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.