The pandemic has upended millions of Americans’ lives financially. Many have experienced lost wages and needing to cut back on expenses to be able to cover rent and put food on the table. Surprisingly, while many have suffered a financial impact and dealing with anxiety over economic uncertainty, credit scores during the pandemic have improved.
According to the consumer credit bureau Experian, it turns out that credit scores have improved during the pandemic. The national average for the consumer FICO score increased 7 points from 2019 to 710. Compared with data from the past decade, this was quite a high bump in scores.
Let’s look at how this global epidemic has impacted credit scores in the U.S., and why there might be an increase in credit scores:
Connection Between Credit and Debt Levels
As you might’ve guessed, there was a link between consumer household’s credit scores and debt levels. Besides credit scores improving, consumers’ average total debt balance decreased by 1%.
Average credit card balances also shrank by 14%, and consumer credit utilization went down by 3.5 percentage points. What’s more, the average number of 30-day delinquencies per person went down 5%.
A Look at Credit Scores Across Generations
According to data by Experian, Millennials raised their credit scores more than any other generation between Q3 of 2019 and Q4 of 2020: Here’s the breakdown by generation:
- Generation Z. Generation Z’s total debt balance increased by 56%, and its average FICO score grew by 6 points.
- Millennials. Millennials had a bump in total debt balance by 9%, and its average FICO score increased by 9 points.
- Generation X. Generation X’s total debt balance rose by 3%, and its average FICO score shot up by 8 points.
- Boomers. Boomer’s total balance increased by 1%, and its average FICO score went up 4 points.
How debt payments are reported impact credit scores
It’s hard to pinpoint exactly one reason behind this dramatic increase in credit scores, as it can be chalked up to a lot of things. One reason could be how debt payments are reported.
Due to new legislation such as the CARES Act, lenders are more forgiving if you miss a payment. So if you’ve already made arrangements or modifications with your lender on your loan payments, then the lender will not report a payment as being delinquent, or late.
Because fewer payments are being reported as being delinquent, even though you might be late or have missed your payments on a loan, your score might’ve seen an increase.
Forbearance and deferment don’t impact credit scores
And under the CARES Act, all federal student loans have been suspended. Any collections on defaulted student loans have been put to a halt. Last, all interest rates have been set to 0% for a period of 60 days. Currently, these changes are in effect until January 31, 2021. After that, payments will be due again.
Because student loan forbearance and deferment don’t impact credit scores, if one’s student loan payments have been put on hold, it could see an improvement in their score. That is if you previously had trouble staying on top of your payments.
Government financial assistance might’ve helped
For those who received stimulus checks and unemployment benefits under the Pandemic Unemployment Assistance (PUA), having that extra money come in might’ve helped them stay on top of their bills.
According to studies by Pew Research done in spring 2020, even without the loss of a job or a financial emergency, nearly a quarter of Americans report they would have trouble paying their bills, or can only pay part of their bills in a given month. And nearly a third (32%), express struggling to pay their bills this month.
More than half who expected a stimulus check say they would use that money to pay for essential expenses, and 21% would put it toward emergency savings. Fourteen percent reported they would put it toward their debt.
Receiving direct government assistance might’ve helped those who were previously struggling to make payments on their rent, bills, credit card and loan payments
It’s important to note that this decrease in credit scores doesn’t mean that the trend will remain. Depending on the state of our economy, political states at large, and whether or not government financial assistance will continue to be available in 2021, once it does end there’s a chance that this positive trend upward won’t continue.
Tips on keeping your credit score high during financial stress
Should you be experiencing financial stress because of the pandemic, here are some ways you can avoid it negatively impacting your credit score:
Reach out to your creditors
Relief programs are available. To start, check the website of your lenders to see what sort of existing economic relief might be available should you be struggling financially. Reach out to your lenders, explain your situation, and see what they might be willing to help you do.
Depending on your situation and the creditor, they might allow you to temporarily hit pause on your payments, miss a payment, lower your payments, or waive late fees.
Your odds of them working with you are boosted if you reach out to them before you fall behind on your payments. You’ll also have a better chance of them being amenable to offering some form of financial relief if you’ve been in good standing with them.
Know what impacts your credit the most.
Your credit score is made up of five main parts:
- Payment history: 35%
- Amounts you owe (aka outstanding balance): 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit 10%
Get into the habit of best credit practices.
As payment history and amounts you owe make up the bulk of your credit score, do your best to stay on top of payments and aim to keep how much you owe on all your credit cards low.
Monitor your score.
Free credit reports are available from each of the three major consumer credit bureaus — Experian, Equifax, and Transunion. You can order one for free one every 12 months. It’s a great way to see where you stand credit-wise. It could also help you spot any errors that might ding your score.
Some credit card networks, money management apps, and personal finance platforms also allow you to check your credit score or monitor your credit. While they might not be pulling data from FICO or VantageScore, which are two of the most common credit scoring models, the credit data you get from these platforms will be pretty similar.
Should you spot a mistake in your credit history, you can file a dispute directly with the credit bureau. Credit bureaus, while they do communicate to one another, are run separately. So depending on which credit report from which bureau you’ll need to reach out to them individually.
Look at alternative ways to report credit.
Besides credit cards, utility payments, and loans, you might be able to report your rent payment history for your credit. If you have a solid history of making on-time rent payments, you might be able to use it to your advantage.
There are a handful of rent-reporting services that will report your rent payments on your behalf. You’ll need to pay a small monthly fee to sign up for this service.
The increase in credit scores during the pandemic is a bright spot in a tumultuous year with a lot of financial and economic uncertainty. Whatever your situation might be, it’s important to keep an eye on your credit to make sure you’re doing what you can to build good credit.