Millions of Americans lost their jobs and skipped debt payments this year. You wouldn’t know it looking at consumer credit scores.
While the coronavirus was pummeling the U.S. economy, Americans’ credit scores were rising. The average FICO credit score stood at 711 in July, up from 708 in April and 706 a year earlier, according to Fair Isaac Corp. Early estimates suggest the average score has held steady through mid-October at the July level, which is the highest since FICO began keeping track in 2005.
The increase is largely thanks to the unprecedented financial assistance the government and lenders rolled out to consumers after the pandemic took hold in the U.S. Stimulus payments and expanded unemployment benefits helped many borrowers keep up with their bills and, in some cases, even pay down their debt. Widespread payment holidays on mortgages, auto loans and student loans freed up funds and kept credit reports clean.
American consumers’ ability to withstand such a severe economic shock is undoubtedly good news. But for lenders, the rise in credit scores is yet another confounding factor that is making it difficult to assess risk.
During the last downturn, loan delinquencies rose along with unemployment, and credit reports reflected missed payments in short order. That hasn’t happened this time, yet millions of Americans are still out of work and surviving on unemployment benefits. The disconnect has scrambled lenders’ underwriting models and sent them in search of new ways to evaluate applicants’ creditworthiness.
One big fear is that consumers’ credit quality could begin to sour if Congress doesn’t reach a deal on additional aid for the unemployed. “We’re afraid that in a couple months there could be real damage to credit reports,” said Francis Creighton, chief executive of the Consumer Data Industry Association.
Ethan Dornhelm, vice president of scores and predictive analytics at FICO, said the scores are typically lagging indicators. In the last downturn, credit scores bottomed out at 686 in October 2009, months after the recession officially ended. “First the macro stress occurs, and then it takes a few months for the strain to show up in people’s credit reports,” he said.
Dormant credit-card accounts are seen as particularly risky these days. Lenders are worried customers will reach for them when unemployment runs out, so they are trimming credit lines and closing some accounts altogether. Even customers with credit scores in the mid-700s—generally seen as more creditworthy and eligible for lower interest rates—haven’t been spared.