How is the pandemic impacting credit scores?

For starters, 5 million student loan borrowers saw their credit scores drop after the CARES Act allowed (Federal) borrowers to defer payments with no interest and no penalty until September 30 (6 months). The loan servicers were supposed to report to the credit bureaus that $0 was owed and paid. Great Lakes reported only that payments were deferred, and several of the credit scoring agencies dinged the borrowers’ scores. Now they have to follow up with the credit reporting agencies to set the record straight, because apparently, Great Lakes will not change their reporting. (Politico) (MarketWatch)

But what happens to everyone who owes money on car or other loans and credit cards? There is no general relief as there is for Federal student loan borrowers. Borrowers are at the mercy of the banks that lent them money. It is MUCH better for borrowers to be proactive and contact their lenders immediately if they will have trouble making payments due to Covid and work something out ASAP, BEFORE missed payments are reported to the credit bureaus. Lenders have the means to tag missed payments with a special code that tells the bureau that the missed payment was the result of a disaster (often used for hurricanes, etc.), so that the event, while recorded, has no impact on the borrower’s score. Many banks are proactively offering help. You may have seen this sort of message when you log on to do your online banking. It is not clear that there is any appetite for a political remedy here, as there seems to be for student loans. For more on the details of this complicated process, this American Banker podcast is quite informative (25 minutes), and includes the history of credit scores.

Another change that has come back in April from the pandemic is that the credit bureaus have changed their “one free report per year” rule to one free report PER WEEK! This would certainly allow you to see if you have any negative events and address them much faster. You still use Annualcreditreport.com to do this. The site has been modified to allow for weekly inquiries. Be on the lookout for “payment modifications” in addition to looking for signed of identity theft/fraudulent use and erroneous information. If you have worked something out with a lender, you may see “payment modification” but your account should still be reported as “current.” The NerdWallet story reiterates what to do if you see errors.

What is new in the world of credit reports/scores?

The FICO Resilience Index will be another tool for lenders to use to consider a borrower’s resilience during an economic crisis. Otherwise, when something like Covid hits, banks may decide to reduce their exposure by cutting credit limits across the board on existing credit cards and lines of credit. The Resilience Index allows them to intelligently target those cuts.

The Index has been under development for ten years. Scores range from 1-99, and lower (under 44) is better (unlike credit scores). Even folks with low credit scores might have a low Resilience Index.   Those with a good Index number are folks with longer credit histories, fewer active accounts, fewer credit inquiries, and lower revolving credit balances.(WTOP) (WAPO)

According to a 2019 Experian study, about one-third of all Americans have a subprime credit score. While all lenders use difference ranges, Experian defined a subprime score as between 580 and 669. On average, subprime borrowers have 7.5 delinquent accounts, which is more than twice the overall average. Subprime borrowers will pay at least double the average interest rates on credit cards, and rack up fees on top of the interest. (CNBC)

And CNBC also reports that women and men had the same average FICO scores at the end of the first quarter of 2020, according to data from Experian. The shared score of 705 was at an historic high. It will certainly be interesting to follow up on this data to see a) how much Covid has impacted this number, and b) whether the scores diverge again by gender.

How do certain actions impact credit reports/scores?

• Receiving a rejection for a credit card has very little long run impact on your credit score. The only impact would be if your application was considered to be a “hard inquiry,” one initiated by you. Even so, the “hard inquiry” may stay on your credit report for two years, but the impact to your score will be gone within months, and no longer than one year. (Business Insider)
• The point of consolidating debt is to ultimately reduce your total payments, save interest, and help you pay down the debt faster. The impact on your credit score may be a bit negative initially (increasing utilization rate), depending on how you consolidate your debt, but the overall benefits may be well worth it. (Fox Business)
• A Chapter 7 bankruptcy will stay on your credit report for ten years, and a Chapter 13 bankruptcy will stay on your credit report for seven years. The impact to your credit score depends on your initial score, hitting higher scores harder.  Bankruptcy should really be considered a last resort. (CNBC)

Payday Lenders/Regulation

The Consumer Financial Protection Bureau has been trying for years to impose rules restricting payday lenders from trapping people in debt, and the payday lending industry spent years lobbying to fight those rules. Well, in early July, the industry won, as the CFPB, under new leadership formally gave up the fight to impose a rule requiring lenders to make sure the borrowers could afford the payments. Twelve million Americans use payday loans every year, paying on average 400% interest.

(NYT) (CNBC)

Trends in Borrowing

 The CFPB reported in late July that credit card applications dropped 40% since the end of March. Those with sufficient means are spending less, and applications for people with higher credit scores dropped 59%, compared to a 34% drop for those with subprime scores. Seems that people believe it must be harder to get credit, but that is not necessarily true. (CNBC)

Based on this news about credit card applications, data from the NY Federal Reserve showing the first quarterly decline in household debt since 2014 from the second quarter of the year over the first is probably not surprising. Credit card debt dropped, car and student loan debt stayed about flat, but mortgage debt rose during this period. Stimulus checks and pandemic unemployment relief may explain the credit card debt. Delinquency rate ticked down on all debt. Consumer delinquencies may be reflecting moves by financial institutions to help their customers during these tough times, and student debt and mortgages forbearance were part of the CARES act. When the moratorium on foreclosures expires, and student loan repayments must begin again, the story may change.

(Yahoo Finance)

Industry news

Intuit, owner of TurboTax and Mint, is set to buy Credit Karma for $7.1 billion. Think about the potential of having all of that financial data under one “roof!” (This may be exactly what causes regulators concern over the transaction.) Credit Karma is a successful tech start-up which reportedly has 100 million customers now, including half of all millennials. This is about double the number of Intuit customers, which tend to be older, and may help them attract younger customers.   (NYT)

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