Rising Debt Levels, COVID and FICO 10 Impacting Consumer Credit Scores
Due to job loss, income loss and other hardships resulting in late payments, consumers are experiencing the double whammy of being forced out of work due to the coronavirus pandemic and then being penalized for the inability to pay basic bills. Recent increases in credit utilization along with late or missing mortgage, credit card, student loan and utility bill payments are, unfortunately, resulting in reduced FICO scores for many Americans. In some cases, even late or missing rent payments are contributing to lowered FICO scores when landlords choose to report to credit bureaus.
The growing awareness around the importance of strong FICO scores and the ability for consumers to monitor their scores at no cost is driving an increase in consumer complaints against credit bureaus. Already beginning to show a spike in January of this year with 479 daily complaints to credit reporting and credit repair services, the coronavirus crisis is exacerbating consumer concerns over their scores and complaint volume continues to rise. The month of April saw a peak of 703 complaints per day and May with a slight reduction to 682.
The Student Loan Trap
Those with student loans are experiencing an unexpected pain. Borrowers taking advantage of the Federal Government’s CARES Act felt the blessed relief of automatically suspended payments and a 0% interest rate through September of this year. However, despite being promised otherwise, borrowers taking advantage of the temporary relief are now finding that their credit scores have been negatively impacted. If you are one of these 5 million borrowers, check your credit score!
Bank Credit is Tightening
Consumers are rightfully frustrated. It’s one thing to lose income suddenly and be unable to cover routine expenses but to have your credit score impacted rubs salt in the wound. Loans, when possibly the most needed, become out of reach for those that may have easily qualified only 2 – 3 months prior.
Case in point: in response to the mortgage industry’s 1900% increase in requests to delay mortgage payments in the month of March, JPMorgan Chase increased their requirements for mortgage borrowers to a FICO minimum score of 700 and a minimum down payment of 20%.
This is happening all the while mortgage refinance requests jumped to the highest level in more than a decade due to historic low interest rates. Those with impeccable credit benefit; those undergoing extreme hardship are left struggling. But banks have to survive too and extending credit to borrowers who have limited opportunity to repay those loans is a recipe to repeat the 2008 housing crisis.
The Long Term Impact
The impact of reduced credit scores is long-term. With a US unemployment rate jumping from 4.4% in March to 14.7% in April, a large number of Americans are predicted to suffer from lower scores resulting in reduced access to capital or capital at affordable rates. Personal loans will rise in importance as consumers attempt to consolidate credit into more favorable terms.
Signs of consumer impact are revealed by a Goldman Sachs security filing showing that credit card and loan customers of their online bank, Marcus, are experiencing deteriorating creditworthiness.
Customers with credit scores below 660 increased by 18% from December to March. The bank prefers customers with scores off 670 or greater as it is an indicator of reliable borrower payback. Scores in the 580 – 669 range indicate greater likelihood of late payments and default. The result? Goldman has pivoted away from focusing on growing its consumer portfolio.
FICO 10 to Penalize Personal Loans
And it potentially gets worse. FICO is now rolling out a new calculation for credit scores known as FICO Score 10. Why FICO 10? A few years ago, after a legal settlement, the major credit reporting agencies (TransUnion, Equifax and Experian) agreed to remove tax liens and judgments from their credit reports. This resulted in arguably inflated credit scores for consumers. Lenders pushed back claiming that these higher credit scores were not representative of the true creditworthiness of their borrowers.
An update from its Score 9 released in 2014, the new FICO score calculation will take into account trending data from the past 24 months. Consumers with favorable trending – those that are working towards paying down debt, will benefit. Those who are trending in the opposite direction and increasing their debt load will experience the consequences of a reduced credit score.
The new calculation will also weigh against unsecured personal loans more heavily and penalize consumers with consolidation loans who have a tendency to incur more debt.
The end result may be a bigger gap in consumers with higher scores vs. lower scores as those with already strong scores stand to see even higher scores. Those with lower scores stand to see reductions. FICO estimates that 110 million consumers will see a change of under 20 points in their score in either direction and 80 million will see swings of greater than 20 points in either direction. Those the most negatively impacted will be those that are lagging in credit card and loan payments.
The Good News?
You have time to prepare. While elements of the new score will begin rolling out in 2020, it may not be until 2021 when the full roll-out takes place and lenders begin to regularly use the new scoring method. Until then, be sure to monitor your score regularly and work towards improving it, especially if it is under 690.
How to Prepare for FICO 10
- Pay your bills on time. Don’t be late!
- Reduce your debt and don’t take on new debt
- If possible, pay your credit card bills in full each month
- Don’t take on a personal loan. However, the reduced interest rate of a debt consolidation loan and more favorable terms may be beneficial if it allows you to reduce your debt load more quickly AND you don’t take on additional debt in the process
Best Personal Loan Options
For most people, the best option for a personal loan is one from friends & family. Providing the most favorable rates and payment terms, friends & family personal loans are the go-to for many consumers who need emergency funding to pay bills, rent, medical bills and other loan payments. Others rely on friends & family for funds needed for a new car, wedding expenses, first-time mortgage or to start a business.
If you need a personal loan, a friends & family loan can also help prevent the credit score trap. If you are already suffering from a low score and are trying to rescue your creditworthiness, friends & family loans can ensure that your bills get paid on time and your credit card debt load is reduced. Since personal loans transacted with friends & family are not reported to credit agencies, they can be a great way to supplement your activities towards repairing your credit.
To learn more how LendAmi can help you transact a personal loan with friends & family in a safe legal and responsible manner, visit our How It Works page.