Fueled by unemployment and a drop in income, many people are still feeling the financial effects of COVID-19. So it would only make sense that credit scores were lower as a result…right?
Strangely enough, according to information released by both FICO and VantageScore (two of the major credit scoring companies), the opposite is true — average credit scores are currently at an all-time high of 711 for FICO (as of July 2020) and a 4-year high of 688 for VantageScore ( as of October 20, 2020).
What’s the reason for the spike? There may be a few.
When the CARES Act was approved in March of this year, stimulus payments provided financial relief for Americans earning less than $75,000 per year (single filers) or $150,000 (married filing jointly). For some, this meant being able to make on-time payments to creditors or even pay down existing debt — both factors that have a significant impact on credit scores.
The CARES Act also provided an additional financial safety net in the form of higher unemployment benefits for those who qualified. For many this added an additional $600 per week in federal aid, on top of what was offered by individual states. In addition, the law also allowed states to choose to extend unemployment benefits to those who normally wouldn’t be eligible — like contract or “gig” workers — according to Equifax.
Just like the stimulus payments, this may have allowed recipients to continue to make on-time payments and pay down debt.
Forbearance and deferment programs
While federal student loan payments were automatically suspended under the CARES Act, a number of other lenders and creditors opted to also follow suit, at their own discretion. This allowed many borrowers to temporarily suspend payments on mortgages, auto loans, and personal loans, while also avoiding certain credit card and bank account fees.
Experian’s State of Credit Report published on October 20, 2020, highlighted the impact of these programs by comparing payment delinquencies in 2019 compared to 2020:
Average 30 – 59 days past due delinquency rates
- 2019: 3.9%
- 2020: 2.4%
Average 60 – 89 days past due delinquency rates
- 2019: 1.9%
- 2020: 1.3%
Average 90 – 180 days past due delinquency rates
- 2019: 6.8%
- 2020: 3.8%
When accounts were placed in forbearance or deferment, many lenders and creditors were required to report them as “current” (as long as they were current before they were placed in forbearance or deferment). This, along with the payment reprieve, may have helped keep credit scores intact.
Credit utilization — the total amount of revolving credit you’ve used versus the total amount available to use — has a significant impact on your credit score under most credit scoring models. According to Reuters and a survey conducted by the New York Federal Reserve, in 2020 “U.S. households cut their debt for the first time in the second quarter in six years.” This was led by a 12% drop in credit card debt, totaling an “unprecedented $110 billion.”
In addition, Experian found the average credit utilization rate dropped from 30% to 26% between 2019 and 2020 and the average credit card balance dropped from $6,629 to $5,897.
Rolling shutdowns and restrictions all across the country have likely contributed to a drop in discretionary spending, and fewer credit card charges. For some, this has also provided an opportunity to pay down existing credit card debt.
A delay in credit impacts
There’s one factor that may not be quite as positive, however.
Credit scores are more indicative of the past than they are the present. This is because it can take a month or more for account changes — like late payments — to be reported to credit reporting agencies (CRAs) and posted to credit reports. So as another stimulus package continues to be stalled and financial help may dwindle, more Americans may begin to see these financial impacts reflected in their credit scores.
How to proactively protect your credit
If you’ve managed to maintain — or even raise — your credit score during the pandemic, there are some ways you may be able to keep the momentum going.
Reach out to your lenders and creditors
Worried you’ll have trouble making payments or fulfilling your financial obligations in the near future? Consider reaching out to your lenders and creditors now to explain your situation and ask if you are eligible for forbearance, deferment, or any other accommodations they are providing. According to Time, credit protections provided under the CARES Act are scheduled to remain until 120 days after the national emergency period ends — which, as of now, is January 20, 2021.
Not only can this provide you with peace of mind, but it may prevent your credit from taking an unnecessary hit.
Keep an eye on your credit report and dispute any errors
It’s not uncommon to find errors on your credit report — like a payment reported as “late” even though you’re in a forbearance or deferment program. Regularly checking each of your credit reports from the primary credit reporting agencies (CRAs) — Experian, Equifax, and TransUnion — can help you stay on top of these credit reporting errors and potentially get them corrected quickly. (You can check each of your credit reports weekly for free between now and April 2021. Learn more here.)
If you do spot an error on your TransUnion credit report, you can create and submit a dispute directly from the Upturn app. You can also find helpful information about submitting disputes to all three CRAs here.
Create a plan for managing or paying down debt
Are you concerned about making debt payments now or in the future? Then it might be a good time to consider how to reorganize in order to make it more manageable.
- A debt consolidation loan
This is essentially a personal loan that you can use to roll your existing debt into one monthly payment. Generally this one payment is more predictable, easier to manage, and may come with a lower interest rate than what you’re currently paying. But make sure to shop around for the best terms and confirm there would be a financial benefit for your specific situation.
- A balance transfer credit card
Another option may be a balance transfer credit card. Some issuers provide an introductory offer for a specified amount of time of low to no interest on balances transferred from other cards. This may temporarily lower your monthly payment (as long as you don’t continue to make new purchases with that card). There are a number of things to be aware of, however, including:
- If you do use the card to make new purchases, you may lose the “grace period” on your card (the interest-free period of time between when your billing cycle ends to when your payment is due). This could mean you will incur interest immediately after making a new purchase with that card.
- If you don’t pay the transferred balance in full by the time the introductory period is up, you could incur interest on the remaining balance at a higher interest rate than what you had with your previous credit card(s).
- You may have to pay a fee to complete the balance transfer. According to Bankrate, this is usually around 3% of the total balance you’re transferring.
Apply for a coronavirus hardship loan
Another option that may help you stay on top of your financial obligations is a coronavirus hardship loan. This is essentially a personal loan offered by some banks and credit unions, often for a small amount ($5,000 or less) with flexible repayment terms. According to Bankrate, some charge low to no interest and may offer to defer the first payment up to 90 days.
The bottom line
Establishing a clear line of communication with your creditors, exploring your options before you fall behind, and keeping a close watch on your credit report may help you stay in control of your credit.
Luckily, Upturn can help. Sign up here to access your TransUnion credit report, dispute any errors you may find, and learn the ins and outs of how credit works.