For all the headlines about the improving economy and record-low mortgage rates, most consumers aren't in a position to benefit from them, according to a report from the Corporation for Enterprise Development (CFED).

The study found that 56% of consumers have subprime credit scores. That means they are unable to take advantage of the best — or even average — interest rates if they need or want to borrow money. The very best rates and terms go only to people who have excellent credit.

Add that to the fact that homeownership has actually dropped to its lowest level in about 20 years, and you have a lot of people sitting on the sidelines reading or hearing about how great the economy is. It's not great for everyone, though, and economic uncertainty is not something experienced only by low-income households.

Many of us live in situations where an unexpected setback — like a health problem or a job loss — could quickly put us in a precarious position because we have inadequate (or no) emergency savings. It's not only a problem for people whose incomes are low, but also for those who consider themselves solidly middle class: One in four households earning between $56,113 and $91,356 have less than three months of expenses saved. It's possible some of this is a result of the recession, which left many without jobs, and, as a result, more debt and damaged credit scores.

Without an emergency fund, economic setbacks can turn into a full-fledged financial disaster. Credit cards or other loans are used to fill the gap. But debt is the second most important factor evaluated when credit scores are calculated, which means that credit scores may drop when balances go up.

Rebuilding bad credit isn't easy. It takes time, for one thing. Payment history is the factor weighted most heavily in calculating your scores, and late payments are reported on credit reports for seven years. Over time, negative information carries less weight (provided current bills are paid on time).

If you don't know how your own credit stacks up, you can check your credit scores for free on Credit.com. It includes a personalized explanation of the factors that make up your score and advice for raising or maintaining it. If yours is not where you want it to be, take time to work on improving it before an unexpected expense arises. That way, you are much more likely to have options for financing.

You can also monitor your scores, but be sure you are monitoring the same score each month to measure your progress. Different credit scoring models may have different ranges. The TransUnion scores used for the CFED report were TransRisk scores, which range from 150 to 934. Most FICO scores and VantageScore 3 scores range from 300–850. Neither is right or wrong, but it can be confusing if you aren't aware of the differences.

Subprime credit scores almost always mean consumers pay much more in interest when they borrow. Over a typical person's lifetime, someone with bad credit can easily pay two or three times the amount of interest someone with excellent credit will pay. (You can calculate your lifetime cost of debt here.) And those who can't get traditional financing may feel that they have little choice than to go to a payday lender when they have unexpected expenses — and those can turn out badly for consumers.



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