esm7i Consumer Credit During COVID-19 and Beyond
The coronavirus pandemic 2020 has led, for the first time in human history, to shutter the world’s economy and international trade. Countries have shut borders even to neighboring trading partners while simultaneously closing millions of businesses to contain the spread of the COVID-19 infection.
How has the COVID-19 pandemic affected consumers’ credit reports and scores
While the pandemic will not affect how credit scores attempt to predict the consumer’s future debt payment patterns, it has led the major consumer reporting agencies to offer credit reports to consumers every week for free through the end of 2020.
Protecting and Building Your Credit in 2020
Although the coronavirus pandemic has led billions worldwide to focus on protecting their health and physical well-being, it has also affected hundreds of millions’ financial livelihood and well-being. The loss of income due to the closure of borders and businesses means a noticeably large percentage of consumers have less income to pay their bills. Coupled with approximately 80% of American households living paycheck-to-paycheck going into the pandemic and its resulting recession, many consumers immediately began missing payments on their credit card accounts, car loans, and even home loans.
Prioritizing Consumer Credit
While physical health and safety tend to outweigh financial health and well-being in the short run, consumer credit reports and scores will play an important role in the household and national recovery in the coming years.
A poor credit rating does not indicate an individual’s lack of effort or irresponsibility when paying bills. Instead, a low credit score is based on recent payment histories and information, and it attempts to predict the probability of the individual missing his or her payments shortly. Lenders use the score to determine their risk in lending to the individual and how they plan to compensate for lending to higher-risk borrowers.
Lenders will offer low-risk borrowers lower interest rates because they are likely to be repaid in full in addition to reasonable interest payments. Lenders working with high-risk borrowers have a high probability of not being repaid. Consequently, they attempt to counter potential losses by charging these individuals higher interest rates.
Coming out of the COVID-19 pandemic, protecting or rebuilding your credit rating will be an important tool in your household’s financial recovery. Since credit scores are solely based on information found on your credit report, you should focus your credit-building efforts primarily on your credit history. Moreover, since recent activity from your credit history has a greater influence on your score than activity from years ago, there are strategies you can use to rebuild your credit faster without making larger or more frequent payments.
Traditional Access to Credit Reports
Since late 2004, Americans have had the right to access their credit reports from the three major consumer reporting agencies (CRAs, also known as credit bureaus) every twelve months. These reports do not have corresponding credit scores, but they list the consumers’ loans, credit accounts, and other debts incurred or being paid over the past seven to ten years.
The website set up for this access was AnnualCreditReport.com. It appeared during a period when for-profit companies were bombarding consumers with ads to get their credit reports at various other sites, even baiting them with so-called free trials that more often than not seemed to trap the consumers in expensive, long-term credit monitoring contracts that were hard to cancel.
More than a decade and a half later, many consumers still are unaware of their right to get a free, no-strings-attached credit report at AnnualCreditReport.com or its corresponding toll-free telephone service at 877-322-8228.
2020 Access to Credit Reports
On April 20, 2020, the CRAs jointly announced their response to the COVID-19 pandemic by providing increased credit support to American consumers. For the remainder of 2020, they would all offer consumers free access to their credit reports through AnnualCreditReport.com each week of the year.
While some consumers called for the CRAs to change their credit score models to reflect the difficult situations so many households were undergoing, such calls indicated the unfamiliarity of many consumers with the roles of CRAs and the purpose of credit scores. Unfortunately, many consumers believe their credit ratings somehow reflect personally on themselves, tying low scores to irresponsibility and high scores to financial success. Neither indicates a valid understanding of credit ratings.
Changing the credit scoring model to improve the scores of those undergoing the financial difficulties of the pandemic might make the consumer feel better about themselves. Still, it would destabilize the entire credit industry. Changing the scoring model would mean it was no longer a valid indicator of creditworthiness, leading potential lenders into great uncertainty. As a result of this greater uncertainty, lenders would be forced to increase their interest rates across the board to address the higher risk they were now at for lending to those with unknown levels of risk.
Traditional Access to Credit Scores
Contrary to popular belief, consumer credit scores are not held in some vault or on a database, waiting for lenders and consumers to view them. Instead, they are generated based on the consumers’ credit history when the score is requested. Information on your credit report can change daily. Since account age is one of the factors in your credit score, you should expect your score to change regularly.
However, suppose you have wondered why your credit scores through lenders vary so much from your scores available through free services like Mint, Credit Karma, and Credit Sesame. In that case, you should know you are looking at different scoring models. Over 90% of all lenders consider your FICO credit score when deciding whether to lend to you. However, free services like those mentioned above offer credit scores from VantageScore (usually version 3.0 or 4.0). While similar in their intent and factors, the FICO and the VantageScore models will almost always produce different scores because they weigh the various credit data on your report differently.
