The American economy lost 20.5 million jobs last month, raising the unemployment rate to 14.7 percent. That’s going to mean a lot of unpaid rent bills, mortgages, car payments and credit card balances soon enough. Which in turn means a lot of people’s credit scores are going to plunge, right? And if that’s the case, what’s going to happen then? Alongside credit expert John Ulzheimer, formerly of FICO and Equifax, we gaze into our post-COVID crystal ball to figure out where the hell we go from here.
Are people’s credit scores declining already?
Probably not so much. For one thing, if people aren’t paying their May mortgages or rent, that won’t be reported, if at all, until May 30th (Ulzheimer says there’s no systematic way to report somebody who’s 1 to 29 days late). But the bigger reason is a provision in the CARES Act that Congress recently passed, in which politicians seemed to have their eye on people’s continuing access to credit.
If you can’t make payments to your lender and you let them know about it, they’ll make an “accommodation,” which usually takes the form of forbearance or deferral for several months (which may or may not include interest accrual). Here’s the key: Once you have made your lender aware, it has to report you as being current. “And so if the lender gives you a forbearance or deferment, both of which would result in you not making a payment, then they can’t report you [to credit agencies] as being past due because they’ve made that accommodation with you,” Ulzheimer says.
Sounds like a pretty big deal.
It is. “The important thing is that if you’re a borrower and you’re not able to make your payment, that you talk to your lender and work out some kind of accommodation — otherwise they can report you as being past due eventually,” Ulzheimer says.
So people’s credit scores aren’t going to go down?
Actually, a lot of people’s scores probably will go down, but Ulzheimer thinks it’ll be for a different reason. He thinks a lot of it will be because people are carrying balances on their credit cards, not paying them off in full each month — i.e., credit card debt. It’ll be something that a lot of people who are unemployed or underemployed will turn to, to make ends meet.
Yeah, but if you’re making the minimum payments…
Your credit score will still take a hit. “One of the most important metrics in consumer credit scoring systems is what’s called ‘revolving utilization,’” Ulzheimer says. “It’s basically the relationship between the balances and the credit limits on your credit cards, expressed as a percentage. And the higher that ratio, the more problematic it can be for your score.” This means you could have a credit report with no delinquencies, missed payments or blemishes of any kind on it, but if your credit card debt goes up, your score will still go down.
How bad is all this going to get?
Ulzheimer doubts that credit scores plunging would become some kind of epidemic. Certainly it’ll be a problem for each individual, but as a nation? Probably not so much. There are 300 million Americans, and 230 million of them have a credit report. With that many people, it’s pretty hard to actually move the collective needle. Think of it like this, he says: It’s like trying to increase your GPA during your senior year, which, by that time, just won’t budge much.
Still, how long will it last for people?
As we saw during the Great Recession, raising your credit score is slow and arduous. “We may have long forgotten about COVID-19 and people will still be having issues with their credit reports, and so to the extent that you’re focused rightfully on health and family right now, I’ve been telling people, don’t take your eye off the ball — and that ball needs to include some kind of credit-related strategy,” Ulzheimer says. That starts with getting an accommodation from your lenders — but it means you need to talk to them in order to keep a clean credit report.
If enough people emerge from this with shitty credit, though, will banks be lowering their standards? Will the government intervene?
Bwahaha! Are you serious? Of course not. Neither the cavalry nor the Wolf is coming. “The long and short of it is, banks aren’t in business to give away money,” Ulzheimer says. “One of the ways you make money is to not lose money. The only way something like these things would happen is if the government essentially guaranteed loans like they would do for student loans.”
In fact, banks will actually go in the other direction, as they’re starting to do now. They’re simply mitigating risk and capping their exposure to losses. “And that’s what they should do,” Ulzheimer says. “They have a fiduciary responsibility to the bank, not to be charitable and give away money.”
There’s no reset button coming then?
No, because the way the credit ratings agencies see it, a credit report is meant to be a factual representation of someone’s relationship with their creditors, and if a person is in debt or missing payments, it’s supposed to reflect that. Even if a once-a-century global pandemic forced you out of work and rendered it impossible to pay your bills! Literally the only thing that matters to a credit-rating agency is whether you can pay back a debt.
“I realize it’s not the most consumer-friendly thing to say right now, but that’s why these things exist: So companies like banks, credit unions, credit card insurers, insurance companies, landlords and employers can assess the risk of doing business or employing somebody,” Ulzheimer says.
In other words, an economy-crushing deadly disease doesn’t matter to credit agencies — all that matters is how likely you are to pay back your debt, no matter the circumstances. Even if you’re actually powerless to pay it back.
So basically, anyone whose credit score dives during COVID will be facing the same challenges as any other time?
Correctamundo. In reality, it’ll mean higher interest rates, depending on your score: Maybe a car loan at 7 percent rather than 3 percent. You’ll still be able to get a car, but now with a higher interest rate. Interest on a mortgage might be at 5 or 6 percent rather than 3 or 4 percent, and that’s really going to add up over 30 years. (Interest on a credit card will go up too, but Ulzheimer points out that unlike almost every other form of credit, credit-card interest is optional, depending on whether you pay off the balance every month.)
Ulzheimer urges people to put this into perspective though: For the past decade or so, the cost of borrowing money has been extremely low. His own father’s first mortgage had an interest rate of 17 percent! So even if your credit score goes sour, it could be a whole lot worse. Historically, this is still a great time to borrow money, for whatever that’s worth to you.
Still, WTF am I supposed to do about it in the meantime?
First, get accommodations from all your creditors to put a shield around your credit report right now, Ulzheimer says. (Again, this makes it a violation of the law for a lender to report you as being delinquent.) It’s an impressive legal backstop that will buy you and millions of others a lot of time, so do make use of it, seriously. Secondly, try not to carry a balance on your credit card — that way, the sky-high interest rate becomes a nonfactor.
After that, as you claw your way back, it’s a matter of choices: For example, do you finance a really nice car at 9 percent interest, or do you finance a vastly more affordable used car at 9 percent interest? Figure out money-management strategies that allow you to borrow less money and to pay back what you’re borrowing — that’s the key. But for now, if you’ve made accommodations, your credit is protected and you can worry about more pressing issues.
Any chance the accommodations will last longer?
Absolutely. Ulzheimer says the law states that they’ll last four months beyond whenever the federal Emergency Declaration ends. Nobody knows when that will be terminated — anything can happen right now, of course. A week, a month, a year, who knows? Shit, we could have a new president in several months. But consider that timeline your safety net… for now, at least.