Millions of Americans lost their jobs and jumped into debt repayment this year. You never know when it will look at consumer credit scores.
As the coronavirus transforms the U.S. economy, American credit scores – a measure used in almost every consumer lending decision – rise. The average FICO credit score rose to 711 in July, from 708 in April and 706 a year earlier, according to Fair Isaac The Corp.
, score creator. Early estimates suggest the average score will be held firmly until mid-October at the July level, which is the highest since FICO began monitoring in 2005.
The increase was largely thanks to the unprecedented financial assistance of the government and lenders launched to consumers after the pandemic that gripped US Stimulus payments and extended unemployment benefits helped many borrowers to keep their charges and, in some cases, even repay their debt Extensive payday loans, auto loans and student loans freed funds and kept the credit report.
The ability of American consumers to endure such a severe economic shock is undoubtedly good news ̵1; an outcome that little can predict in the early days of the pandemic. But for lenders, the increase in credit scores is another confusing factor that makes it difficult to analyze risk.
In the last downturn, debt delinquencies increased along with unemployment, and credit reports reflected short-term disbursements. That did not happen at this time, but millions of Americans are still out of work and surviving unemployment benefits. Disconnection scrambled for lender underwriting models and sent them in search of new ways to evaluate applicants ’credibility.
A fear is that the quality of consumer credit could start to sour if Congress does not reach an agreement on further assistance for the unemployed. “We fear that in a few months there could be real damage to credit reports,” said Francis Creighton, chief executive of the Consumer Data Industry Association, which represents credit reporting firms.
FICO scores, ranging from 300 to 850, are calculated using the information in the consumer credit reports, including the credit-card debt ratio owed to the total spending limit, payment history and previous applications of the loan. They do not take into account work history or income.
Ethan Dornhelm, vice president of scores and predictable analytics at FICO, said scores are generally always indicators. In the last fall, credit scores dropped to 686 in October 2009-months after the official end of the recession.
“First the macro stress occurs, and then it takes several months before the strain on people’s credit reports is shown,” he said. Government relaxation and stimulus programs “have an added impact in pushing that stress out for many people.”
‘We are convinced that new methods of credit eligibility assessment, such as cash-flow personal data analysis, offer a real reflection of risk …’
What’s more, many of the borrower’s credit profiles appear to have improved in recent months. Reducing credit-card spending has helped reduce the total outstanding debt on the card. Government lending and lending programs have helped borrowers stay current in their debts.
Dee Donnell’s credit score was below 500 – deep in subprime territory – in February, when he lost his job at a health insurance company. The 45-year-old used part of his order to pay off approximately $ 10,000 of credit-card debt, which he said cost him $ 600 at the minimum monthly payment. He was able to cover his other bills with his outstanding separation, savings and his $ 1,200 stimulus payment.
In July, Ms. Donnell got a job working in compliance with a startup. His credit score is almost 700.
“Covid forced me to really look at my finances,” he said.
Lenders have been talking about their underwriting models since the pandemic began, according to senior executives at large banks, in an effort to prevent applicants from approving unemployed debt and on the side of under government assistance. Some are also looking to identify existing customers with a higher risk of default.
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To see these risks, large banks include JPMorgan Chase JPM -0.21%
& Co., Bank of America The Corp.
The BAC 0.37%
, Wells Fargo WFC -0.39%
& Co. at Citigroup Inc.
is looking to increase credit reports and scores with real-time income or cash-flow data, according to people familiar with the matter.
That involves checking their own bank-account data when evaluating certain applicants. Some weigh in on information from other financial institutions. (In most cases, they will need an applicant’s permission to use that bank-account data in the underwriting process.)
Lenders are interested in the data to evaluate new loan applicants, in particular, those looking for credit cards and other loans that do not typically require income documentation. Some are also discussing the use of cash-flow analytics – for example, a lag in deposits indicating a recent layoff – to determine if creditors’ credit lines will be cut.
Fineness, a financial technology company, has talked to banks about providing some of this data. “We are convinced that new methods of credit eligibility assessment, such as examining personal cash flow data, offer a real reflection on risk, and many banks are rapidly approaching that idea, “said Chief Executive Steve Smith.
Dormant credit-card accounts are seen as particularly risky right now. Lenders are worried that customers will reach them when they run out of jobs, so they cut credit lines and close some accounts altogether. Even customers with credit scores in the mid-700s – generally seen as more trustworthy and eligible for lower interest rates – have not yet been rescued.
Despite the concerns of lenders, there is evidence that Americans are giving priority to repaying pandemic debt. In a June survey of approximately 1,300 households, the Federal Reserve Bank of New York found that those who received stimulus payments used 35% of the funds to repay the debt.
Ben Rohrs, 42, was fired from his job as a technology product manager in March. He and his wife paused about $ 5,000 a month in monthly mortgage payments for six months, and used the released funds – including his wife’s unemployment and income – to keep up with their credit bills. -card.
Mr. Rohrs started a new job last week. His credit score was close to 830, which was in March.
“I think it is really fortunate to have increased unemployment insurance, and having a deferral mortgage is enormous,” he said.
Write to Annamaria Andriotis at [email protected]
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