Credit Scores Rose to Record Levels During Pandemic
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Here's your Money Briefing for Monday, October 19th. I'm J.R. Whalen for The Wall Street Journal. The pandemic has taken its toll on millions of Americans' personal finances, a struggle to pay bills or maybe even to find a job. But an unexpected bright spot emerged over the summer. Average credit scores hit record highs.
In normal circumstances, one would say credit scores increase. That's a great sign. It's a great sign of consumer financial health. and should mean that lenders should feel more confident to lend to more people. But we're in anything but normal circumstances.
Anna Maria Andriotis covers consumer finance for The Wall Street Journal. Coming up, she'll explain what drove credit scores higher and why higher scores won't necessarily make it easier for consumers to get a loan in the future. That's after the break.
Rising credit scores isn't something you'd expect to see as a result of the pandemic, but that's exactly what happened in July. Our consumer credit reporter, Ana Maria Andriotis, has been tracking this, and she's here to explain what's going on. Ana Maria, thanks for being with us.
Great to be with you.
So shouldn't we expect to see delinquencies rise along with unemployment during an economic downturn?
typically during an economic downturn, when there is an increase in the unemployment rate, there will also be an increase in the delinquency rates. That certainly played out during the last financial downturn, but that has not happened yet during this financial crisis.
Why did average U.S. credit scores hit a record high during the pandemic?
And it is creating a host of issues for lenders who are trying to get clarity on whether loan applicants are likely to pay back their debts or not.
Okay, so a perfect credit score is 850. So where had scores reached over the summer?
So the average credit score in the US rose to a record high of 711 in July. This is according to FICO. This is the credit score that is used by most lenders as part of their underwriting decisions. So that 711 was 708 in April. just as the pandemic was really getting underway here. And it was 706 in July of last year, July of 2019. So the average score has gone up, which is the opposite of what one would expect during a downturn when millions of people have lost their jobs.
Well, these past six months have not been easy on consumers. So what is it about their personal financial situation that's driven the credit scores higher?
Several things have impacted credit scores. Yes, consumers have been spending less. They've been charging less on their credit cards than they were prior to the pandemic. However, also playing a very large role is in what has occurred to credit scores is the unprecedented financial assistance that the government has given to unemployed people. They were at $600 a week up until the end of July, the stimulus checks that went out as well. There has also been an unprecedented amount of assistance offered by lenders, particularly with regards to deferment programs that have allowed people to not make their payments their monthly payments on their debts, and to not be penalized for that, to not encurlate fees and to not have
those delayed payments, those missed payments be reported to their credit reports, which would of course have negatively impacted their credit scores. None of that happened. So essentially you have a mix of the government giving people financial assistance, something that helped many unemployed people to continue making their payments, to not fall behind, also mixed in with lenders allowing people to not make their payments on their debts, be it their mortgage or their auto loan or their credit card, and to not report them as being late to the credit reporting firms. All of that has helped people's credit scores. The decline in spending has also played a role because a significant share of people's credit scores isn't just based on whether they're paying their debts on time or not,
But it also factors in the ratio between the amount of credit card debt that they have compared to their card spending limits. So as people spent less, as people got money from the government and put that towards paying down their credit card debt, all of this helped to, for some people, keep their scores steady.
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