Average Credit Scores Rise Amidst the Coronavirus Pandemic
FICO, an organization that tracks one of the most important metrics used by lending institutions has reported an increase in credit scores at the verge of the Coronavirus pandemic. According to FICO, the average credit scores have increased from 706 in 2019 to 708 in April, 711 in July and through mid-October 2020. This increase can be attributed to the financial assistance that both lenders and the government have provided to consumers after the Coronavirus pandemic hit the US.
How are FICO scores calculated?
FICO scores range from 300 to 850 and are calculated using different consumer information that is derived from their credit reports. For instance, the applicant’s payment history, credit card debt owed to total spending limit as well as loan applications made prior, will determine their credit score. Other factors such as the consumer’s employment history and income aren’t used when calculating their credit score.
What is attributed to higher credit scores?
The government facilitates unemployment benefits which allow many borrowers to avoid missed payments and, in some cases, clear their loans. Lending institutions also allowed their customers to make widespread holiday payments for their mortgages, car loans, and student loans. This ensured that their credit reports were not tainted after Covid-19. Amidst the saddening news of lives lost during this pandemic, it comes as a surprise that American consumers have been able to withstand the severe economic shock, especially in the early days. For lending institutions, this rise in average credit scores is likely to make it difficult for them to assess risk.
New models needed to assess creditworthiness
It’s more common to see an increase in loan delinquencies in an economic downturn. That’s why it’s pleasantly surprising for consumers that this hasn’t been the case in the early months of this pandemic. As millions of Americans are still out of work and are now surviving on unemployment benefits, lenders are looking for better models to evaluate their applicant’s creditworthiness. A looming fear is that the credit quality would become worse if the government doesn’t provide additional aid for the unemployed. In October 2009, credit scores were at an all-time low of 686 just a few months after the recession ended. This goes to show that there’s a risk of credit scores shooting up immediately after the crisis and then the strain begins to show up in people’s reports a few years later.
As consumers lower their credit card spending and take advantage of the government stimulus and lender deferment programs, they are able to stay current on their debts and lower their total outstanding debt. However, lenders are worried about their consumers with dormant credit cards that they will begin using them when unemployment runs out. Many lenders are trimming credit lines and even closing some dormant accounts to avoid this. However, a recent report that was done by the Federal Reserve Bank of New York found that Americans are giving more priority to paying off their debts during the pandemic. Credit experts are now recommending new ways of assessing consumer creditworthiness such as reviewing their personal cash flow data.
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