The latest economic casualty? Falling FICO credit scores

If you haven't checked your credit score in awhile, you could be in for a shock.

According to a report by the Associated Press, millions of U.S. borrowers have experienced significant declines in their FICO scores -- the grading system most banks use in their lending decisions -- amid high unemployment and limited access to credit. That scoring shift means many borrowers will find it increasingly difficult to qualify for affordable mortgages, auto loans and credit cards. "Millions more people will pay more over the next several years for credit," says Gail Hillebrand, financial services campaign manager with nonprofit Consumers Union in San Francisco.

But credit scores aren't only moving lower. The FICO data shows an increasing number of borrowers on the fringes of its scoring range, which runs from 300 to 850, with fewer borrowers in the middle of that range. As of April, FICO's analysis of consumer credit reports showed:

• About 25.5 percent of consumers, or nearly 43.4 million borrowers, had FICO scores below 600. That's a major shift from the 15 percent of consumers who historically have had scores below that level.
  
• 11.9 percent of borrowers have scores between 650 and 699, down from 15 percent historically.
  
• 17.9 percent have scores of 800 or above, up from the historical average of 13 percent. Still, the number of high scoring borrowers is down from 18.7 percent in April 2008, just months before the stock market suffered a massive drop and the recession shifted into high gear.

The increase among high scorers appears to be the result of consumer efforts to pay down debt, Hillebrand says. "There has been a trend toward less debt" among those who can afford to pay, she says, with Federal Reserve data showing that credit card debt levels have now declined for 20 straight months. FICO rewards borrowers for responsible debt management, including low balances.

The broader decline in FICO scores is less surprising. Following weakness in employment numbers and home prices, FICO scores are apparently just the latest casualty of the economy's ongoing woes.

Along with job losses that have made repayment difficult for consumers, banks have also had a role to play, adjusting their lending by cutting credit lines and increasing interest rates. Since FICO scores compare debt levels to credit limits, those lowered lines can hurt borrowers' scores, making it appear "you're closer to maxing out when, in fact, your behavior hasn't changed at all," Hillebrand says. Higher interest rates, meanwhile, make it tougher for consumers to repay their existing debts. For cardholders whose annual percentage rates rose ahead of the Credit CARD Act, "all those people are still living with those higher rates," Hillebrand says.

See related: Credit card lending standards keep tightening, Fed report says, Consumer credit card debt falls for 20th straight month, A guide to the Credit CARD Act of 2009