The COVID-19 pandemic set off the biggest economic downturn in over a decade. But despite the languishing job market and continuing uncertainty, consumer credit is currently at a record high, according to a recent report by the Wall Street Journal.
The average FICO score was up to 711, as of July, the highest recorded average since the Fair Isaac Corporation started keeping track in 2005. This is up not only from April but also year-over-year. The effects of COVID-19 and widespread unemployment are not reflected in consumer credit scores.
With the loss of jobs and reliable sources of income, it might be expected that there would be a corresponding increase in late credit card payments and defaulting on loans. This has not happened, as the FICO data clearly shows. Government stimulus and broadened unemployment benefits, together with holidays on debts, have helped Americans keep on top of their personal finances, despite the pandemic.
In the face of this surprising data, lenders are seeking new types of information on which to assess risk. One of these is tracking the cash-flow of prospective borrowers. America’s top banks are considering adding reports on cash-flow or income reports to credit scores. In the current environment, lenders do not have a metric which can actually verify a borrower’s employment status or long-term economic stability. Banks are looking into tracking the rate of new deposits into accounts, among other things, to help make lending decisions.
Credit score is generally a lagging indicator. It may be that it is only a matter of time before it crashes. COVID relief will not last forever, and mortgages cannot be frozen indefinitely. During the Great Recession of 2008, credit score did not hit rock-bottom until October of 2009.
There are hopeful signs, however. The Federal Reserve Bank of New York surveyed around 1,300 households in June. Of the households receiving government stimulus, 35% were using that money to help pay off their debt. It may be that the COVID crisis has taught many people important lessons in financial responsibility.