Credit 'Blind Spot' Can Affect Consumers' Ability to Borrow
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Here's your Money Briefing for Monday, June 29th. I'm J.R. Whalen for The Wall Street Journal. Millions of Americans are taking advantage of programs that let them put loan payments on hold during the pandemic. Good news for struggling consumers. Not so good for the credit industry, because those missed payments aren't showing up on credit scores.
The question is, the banks don't know who's going to pay and who isn't. And they're trying to all figure out what's the best data available. that we can turn to at this point to gain more certainty over the likelihood of the loan applicant we're looking at repaying or not repaying their loan before we extend them credit.
What does that confusion mean for consumers?
How did stimulus-era payment protections create a ‘credit blind spot’ for lenders?
Our reporter Anna Maria Andriotis will have that part of the story after the break.
If you miss a credit card or a car payment, that's typically counted on your credit score. Lenders use your score to decide if you're a safe bet. But as part of the federal government's response to the pandemic, credit scores don't reflect payments that consumers are allowed to miss. Our reporter Anna Maria Andriotis is here to explain the confusion that's created among lenders. So, Anna Maria, how do consumers' missed payments not getting factored into their credit scores create a cloudy picture for lenders?
Lenders are having a difficult time determining who to lend to and who not to lend to. And that's because when people apply for loans and lenders look at their credit scores, the credit scores don't reflect, or at least they're not supposed to reflect, that people are in deferments, forbearance, or some other type of hardship status tied to the pandemic. So somebody may come in with a 750, a very high credit score, for example. And in normal times, that person would be approved. A few questions asked for something like a credit card or a personal loan. But right now, that 750 might not be as strong of a borrower because that individual could have deferred their existing loan payments. And the last thing that a lender wants to do at this point is approve somebody for whatever
credit when they're not paying their existing loans with their existing creditors.
But lenders played a significant role in giving people opportunities to defer payments.
In many ways, this has kind of become a cyclical problem, meaning that around the middle of March, it was very obvious that many people had been impacted by the pandemic and were losing their jobs and would not be able to make their debt payments. So many lenders, the biggest banks and others, decided that they were going to allow consumers to delay making payments and not penalize them for that. The economic stimulus package that was signed into law in late March, basically what that said was if a lender decides to help a borrower out and allow them to miss their payments, they can't penalize them with negative information that would get reflected into their credit score. And so what that's resulted in is this kind of confusing environment where there's all these different types of notes and codes and other marks on people's credit reports that are either saying this person's in deferment, this person's in forbearance, this person in some cases are using notes that are tied to natural disasters.
On credit reports, there are boxes that indicate whether people have paid on time or not. And in some cases now, those boxes are being left blank. So when a lender is reviewing loan applications and they're looking at credit reports, there isn't one uniform standard to look at to easily identify all the people who are in some type of deferment program. So there's a bit of guesswork that's involved there. And in an environment where there are more than 100 million consumer loan accounts, including student loans, auto loans, credit cards, mortgages, et cetera, more than 100 million of these accounts are in some type of deferment status. We're kind of in an unprecedented situation where the numbers are too high
The notes on credit reports are kind of confusing, and the credit scores for many people are not reflecting the reality of what's going on in their own financial situation.
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