While COVID-19 has disrupted nearly every aspect of our daily lives, the pandemic has actually been a boon for Americans’ creditworthiness. With unprecedented monetary and fiscal policy leaving U.S. citizens flush with cash, the U.S. government’s spending spree helped the average U.S. FICO Score hit a new all-time high of 716
However, with COVID-19 ushering in stay-at-home orders, business closures, upending consumer mobility and disrupting U.S. economic activity, shouldn’t these dynamic have weighed on individuals’ credit scores. Well, like most things in life, there is more to the story than meets the eye.
With government-mandated shutdowns leaving household finances extremely wounded, the U.S. federal government sent stimulus checks to every American and provided an addition $600 per week in enhanced unemployment benefits. In turn, this increased the U.S. federal debt from $23.2 trillion in the first quarter of 2020 to $28.5 trillion in the second quarter of 2021.
However, with an outflow from one party resulting in an inflow to another party, the massive spending program resulted in a surge in U.S. commercial bank deposits. For context, commercial bank deposits are checking and savings accounts that allow individuals to withdraw their money at any time. And with U.S. commercial bank deposits increasing from $13.3 trillion in January 2020 to $17.7 trillion in November 2021, U.S. citizens’ bank accounts increased in value even as the pandemic worsened. As a result, they were able to pay their bills and avoid any unnecessary harm to their credit scores.
As further evidence, FICO data showed that individuals with the highest credit risk pre-pandemic saw their credit scores rise the most in 2021. As such, the beneficiaries of enhanced unemployment benefits have seen their financial profiles improve by much more than their higher-income counterparts.
The report revealed:
Another important driver uplifting the average U.S. FICO Score has been the wealth effect. For context, individuals’ assets and liabilities go a long way in determining their creditworthiness, and therefore, their credit score.
From a lender’s perspective, the value of an individual’s home and/or investment holdings can act as collateral and determine whether or not an individual is approved for a loan. Moreover, when individuals’ assets rise relative to their liabilities, the equity buffer reduces their credit risk, and therefore, increases their credit score.
And with the S&P/Case-Shiller U.S. National Home Price Index increasing by 19.9% year-over-year (YoY) in August – a new all-time high – rapidly rising home prices left homeowners with more equity in their properties than ever before. As a result, their ability to repay debt improved and the home price appreciation helped increase their credit score.
Second, rising stock prices are another important component of the wealth effect. With individuals’ investment portfolios rising in value in 2020 and 2021, the unrealized gains can also be used as collateral for a loan and/or increase individuals’ ability to service their current debt. In turn, this helps increase their credit score. For context, the S&P 500 has increased by more than 100% since the March 2020 bottom and is up by more than 30% from its pre-COVID high.
And as the former Chairman of the U.S. Federal Reserve (Fed) Ben Bernanke said in 2003:
With U.S. job openings hitting an all-time high during the pandemic, labor demand went from the outhouse to the penthouse. And when lenders analyze individuals’ creditworthiness, steady employment is one of the most important factors that influence their decision.
For example, during times of economic stress, job openings often decline. And with businesses prioritizing survival over expansion, the anxiety weighs on households’ finances, As a result, individuals often fall behind on their mortgage, credit card and/or auto loan payments, which wreaks havoc on their credit score. Conversely, when demand for labor is strong, individuals often enjoy job security. Or at the very least, they can replace their current income if trouble strikes their current employer. Thus, the rapid rise in U.S. job openings acts as a fundamental foundation that supports higher credit scores.
Speaking of which, the New York Fed’s latest Survey of Consumer Expectations revealed that predictable income streams have been realized across the board:
As a result, all of the forces outlined above have combined to create an economic environment that supports higher credit scores.
With more money coming in for individuals and less money going out, the icing on the cake for higher credit scores has been declining delinquency rates. With the CARES Act and individual lenders offering loan forbearance programs, delinquency rates have declined since the outset of the pandemic. What’s more, severely derogatory delinquencies – which often result in repossession, foreclosure or a loan ‘charge off’ – fell to their lowest level in more than 10 years.
According to the New York Fed’s latest Household Debt and Credit Report, as of late September, 2.7% of outstanding debt was in some stage of delinquency, a 2% decrease from the fourth quarter of 2019. Moreover, FICO data showed that as of April 2021, just 15% of the population has had a 30+ day past due missed payment in the past year. This is down from 19.6% as of April 2020.
More importantly, though, since 35% of the overall FICO Score calculation is determined by your payment history, on-time payments often make-or-break an individuals’ credit profile.
Similarly, delinquency rates by product have also declined sharply since the start of the pandemic. For example, since the U.S. Department of Education reports loans that are eligible for CARES Act forbearances as ‘current,’ only ~5.3% of aggregate student loan debt was 90+ days delinquent or in default as of the third quarter of 2021.
Similarly, auto loan and credit card delinquencies have also declined, as government stimulus programs and bank-offered forbearance options helped ease the burden on borrowers.
Finally, with household wealth rising alongside the number of lenient lenders, consumer bankruptcies hit an all-time low during the pandemic. And with individuals’ creditworthiness moving in the opposite direction, U.S. credit scores have been the main beneficiaries.
The New York Fed’s Household Debt and Credit Report revealed:
While the coronavirus pandemic has forced us to adapt to a ‘new normal,’ old school credit metrics remain intact: when household wealth increases and delinquency rates decrease, the combination puts upward pressure on individuals’ credit scores. And with stimulus programs, enhanced unemployment benefits, rising home and stock prices, record job openings and rising incomes uplifting the former, it’s logical to see a rise in the latter. However, if government spending pulls back and interest rates rise materially, we could see the opposite effect unfold in the future.