As is the case with every facet of consumer spending and credit card usage, credit scores have changed during the COVID-19 pandemic. Because of how long this pandemic has lasted, many people became unemployed or started working fewer hours to accommodate the temporary shutdowns that took place in many industries.
As a result, a large percentage of consumers were bringing in less income. By having access to less income, it’s possible that credit scores would drop significantly as a result of late payments or foreclosures. On the other hand, people could be more cautious about spending too much of their money. The following guide looks at the types of effects the pandemic had on credit scores.
How Credit Scores Have Changed During the Pandemic
When looking at FICO credit score data from Experian, this data indicates that the average credit score has increased throughout the pandemic. At the beginning of 2020, the average credit score in the U.S. was right around 703. This average score had increased to 711 by the end of 2020 despite the impact that the pandemic had on household finances. Another credit-scoring model called VantageScore also saw an increase of four points in average credit scores between 2019 and 2020.
Even though VantageScore was created by TransUnion, Experian, and Equifax as an alternative to FICO, it isn’t used as widely. The average score for VantageScore at the end of 2020 was just 690. The difference between VantageScore and FICO is that VantageScore generates scores from a larger population and doesn’t require up to six months of credit usage to generate a score. Throughout the pandemic, more Americans have risen above the subprime VantageScore category, which involves any score from 300-600. In January 2020, over 25% of all consumers had subprime scores. These numbers fell to 23% by the end of November 2020, which indicates that credit scores are increasing.
How Consumers Benefit From Lender Accommodations
One of the reasons that can explain the increase in credit scores during the pandemic is that many consumers have benefited from lender accommodations while the pandemic is ongoing. Most of the consumers who were able to get out of the subprime credit category did so because of these accommodations. Many credit card companies and lenders worked with consumers during the pandemic to reduce minimum monthly payments and delay payments altogether.
As a result of a provision that was included in the CARES Act that was first passed in 2020, lenders must report accounts that have accommodations as being “paid as agreed” or current as long as the borrower adheres to the details of the arrangement. With this level of protection in place, consumer credit scores wouldn’t drop unless preexisting delinquencies caused a drop.
Despite the protection, however, consumer credit scores haven’t been entirely frozen. Once Congress or President Biden terminates the national COVID-19 emergency, any provisions in the CARES Act will only remain in place for 120 additional days, after which lenders could request full repayment.
How Consumers Paid Down Debt
Another reason that the average credit score has increased during the pandemic is that many consumers have paid down some of the debt that they owe. They were able to pay down their debt because of the stimulus payments and increased unemployment benefits. Since Americans weren’t dining out or traveling as much during the height of the pandemic, only a smaller portion of credit limits was being reached by consumers.
According to a consumer credit review by Experian, consumers were able to cut credit card debt by nearly 15% in 2020, which invariably helped increase credit scores. Credit utilization rates also dropped by around 3.5 points between 2019 and 2020. Keep in mind that many consumers have extra cash in their bank accounts because of a repayment pause for certain student loans that lasts through September 30 as well as mortgage loan forbearance for any loans backed by Freddie Mac or Fannie Mae.
Will These Changes Last
While many of the changes that have occurred during the pandemic should help Americans better understand how to manage their credit scores and handle their finances, most of the protections that helped facilitate an increase in the average credit score will go away towards the end of 2021 and into 2022. For instance, there’s very little chance that people will continue to receive high unemployment benefits and stimulus checks in the future, which will make it more difficult to pay off debt.
To prepare for the end of these protections, it’s important to take steps to improve your credit and reduce debt, which will pay dividends in the future. Two easy methods for improving a credit score include keeping credit utilization below 30% and making payments on time. Paying off an entire credit card balance can increase credit scores as well.
