The Current State of Credit Scoring

During a pandemic, understanding your credit score with the help of credit monitoring services is crucial. Not only can it impact whether or not you can lease a car to make it to your new job, but you’ll need a higher score for refinancing your home when the need arises.

During these times, finances are so unstable that many people don’t know what their situation will be in the near future. For this reason, it’s important to keep an eye on spending habits and credit scores to ensure that the future can still be the one we hoped for before we were hit by the pandemic.

Staying on top of your credit score is more crucial now than ever, and it’s expected that scores and spending habits will continue to be impacted with coronavirus. Here’s what you need to know about the current state of credit scoring. 

COVID-19 Effects

Along with the rest of the world, America is continuing to manage the impact of COVID-19. With swift and sure changes that began in early March and April of 2020, we’ve already seen effects on consumer finances and spending.

Millions of Americans lost their jobs or had hours of reduced pay. Disruptions such as these have slowed much of the US economy, turning it into a recession that has ended the United States’ long economic expansion.

With the loss of income, we’ve seen a change in consumer spending behavior and how they are interacting with debt and credit. 

Consumer Finances

Based on VantageScore 3.0, Experian has cited that credit scores have gone up in states like California, Illinois, and New Jersey. However, as Americans go back to work after a job loss, the data will continue to evolve. These trends are also likely to change as “economic stimulus and relief measures expire.”

Behavior Surrounding Credit 

The COVID-19 pandemic has affected the way consumers spend due to the country’s economic downtrend from increasing unemployment rates, loss of income, and uncertainty about the coming months.

However, coming out of the pandemic’s aftermath would mean rebuilding consumers’ credit score rating which is an essential tool in any household’s recovery.

To be able to do just that, consumers should focus more on building their credit from their credit history because scores are based on reports.

Increase in Unemployment

With the loss of income and unemployment rates skyrocketing during the pandemic, Americans with little to no savings were found to have few options.

They were unable to cover any existing debt payments to bring their credit scores up, and a loss of income means that they would likely be making decisions that could impact everyday life, and ultimately, their credit scores.

While unemployment benefits were extended and American’s received a one-time stimulus check, many were still left without the ability to pay off their debts.

While you might expect that debt and credit would be impacted in the areas of the United States that were affected with the highest unemployment rates, the Experian analysis did not find a strong correlation between unemployment rates and debt or credit growth or decline. 

Debt is Down, and Credit Scores are Up

Believe it or not, even with the coronavirus pandemic, the average total debt is down while credit scores are up.

The average amount of debt per individual has continued to decline throughout the pandemic, which means that credit scores are increasing at a higher rate. Not to mention, credit utilization, a significant factor of credit scoring, is also down.

In fact, the average VantageScore has increased five points in 2020, while debts have shrunk by 1%, according to Experian.

What we can hope this means is that American consumers have made drastic changes to their everyday lives, especially when it comes to their finances and spending during the pandemic.

Consumers continue to pay their debts; however, they are using their credit cards less and are refraining from creating new ones.

On the other hand, there are some categories that have seen an increase during the past few months, including personal loan balance. According to the analysis, this debt category has grown 2% since the beginning of 2020, which means that there was heightened borrowing at the beginning of the pandemic. 

According to the same Experian report, despite the changes to many American’s employment statuses, income, and buying habits since the beginning of COVID-19, consumer credit scores seem to be resilient. While finances have continuously had pressure put on them, data shows signs of decreasing debt and ever-increasing credit.

This is not to say that this will be the trend as we continue to navigate the pandemic. It’s expected that spending will also change as economies continue to reopen, so debt levels may fluctuate as economic relief such as unemployment benefits run out from state to state. 

The Unknown of Credit Scoring in 2021

According to Forbes, it’s difficult to determine right now how credit scores will ultimately be affected by COVID-19, especially as data is still being gathered and reported differently.

During unprecedented times such as these, credit reporting agencies are putting in a lot of work to determine how different situations, such as a pandemic, should be reported and treated. 

VantageScore has certain guidelines for how it treats forbearance and deferment codes for consumer loans that may have received payment relief. However, keep in mind that VantageScore almost always comes up with different credit scores because the information they gather is weighted from various data from your report.

As a result of any forbearance or deferment, consumers may see their credit scores fluctuate. 

VantageScore made a brief statement saying, “We are making adjustments to our proprietary VantageScore 3.0 and 4.0 model algorithms to minimize the potential of any negative impact associated uniquely with the usage of forbearance and deferment codes.” 

Check Your Credit Scores Today 

The true impact of COVID-19 on credit scores is still unknown. However, consumers should be aware that they can still dispute credit reporting errors and receive loan accommodations if they’re impacted by COVID-19.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March 2020, ensured that consumers could receive accommodations without having their credit scores negatively impacted. 

When it comes to credit scoring in 2021, it’s best for consumers to continue to monitor their spending habits and ensure that they understand what can impact their scores.

To help you manage the uncertainties of your credit score during this volatile time, sign up with SmartCredit today.