Consumer Credit During COVID-19 and Beyond

The coronavirus pandemic of 2020 has led, for the first time in human history, to the shuttering of the world’s economy and to 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 the way 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 around the world to focus on protecting their health and physical well-being, it has also affected the financial livelihood and well-being of hundreds of millions globally. 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 the fact that approximately 80% of American households were 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 it comes to 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 in the near future. The score is used by lenders 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 have a high likelihood of being repaid in full in addition to reasonable interest payments. When lenders work with high-risk borrowers, they 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 come with corresponding credit scores, but they do 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 not aware 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, but it would destabilize the entire credit industry. Changing the scoring model would mean it was no longer a valid indicator of credit worthiness, 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 in order to address the higher risk the 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 at the time the score is requested. Information on your credit report can change daily. In fact, since account age is one of the factors in your credit score, you should expect your score to change regularly.

However, if 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, you should be aware you are looking at different scoring models. Over 90% of all lenders consider your FICO credit score when making decisions about 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 even their factors, the FICO and the VantageScore models will almost always produce different scores because they weight the various credit data on your report differently.

Even the credit card companies and banks who advertise that they offer free FICO scores to their customers typically offer FICO scores that are out of date or that are otherwise rarely used by most lenders.

Why are there so many credit scoring models and credit reporting agencies, you may ask? We hear this question often. The best response is to modify the question and ask it again: Why are there so many different car companies? Can’t they just make one car for everyone?

Since credit scores are made for lenders and businesses, not for consumers, each business may have different needs or require different details in their scores based on their approach to lending. Additionally, each of the three credit bureaus believes they can provide better service and products than the other two.

2020 Access to Credit Scores

FICO has not announced any plans to give away its score to consumers during the COVID-19 crisis, nor are we expecting them to. As a consumer, you need to check your credit REPORT regularly to ensure there is no fraud or errors on it. FICO can easily argue that checking your credit SCORE as a consumer serves no purpose beyond fulfilling personal interest and curiosity (although some use it for so-called bragging rights).

That said, checking your credit score on a regular basis can offer you a quick way of staying aware of major or unexpected changes to your credit report. If you check your credit weekly or even monthly and your score suddenly drops or increases unexpectedly, this can be a good indication that there is fraudulent or at least suspicious activity on your report you should investigate.

Daily Credit Scores

These organizations offer you access to your updated VantageScore credit rating every day:

• NerdWallet.com: Get access to your free credit score whenever you like, in addition to receiving 24/7 free monitoring to know when things change on your report.

• WalletHub.com: This service offers you a free credit score update every day.

Weekly Credit Scores

Consider signing up for these free services to check your VantageScore weekly:

• CreditKarma.com: Get your updated credit score once every seven days.

• CreditWise.com: You do not need to be a Capital One customer to use this free resource that gives you access to your free credit score every week. CreditWise.com also has a nice calculator you can use to estimate what your credit score would be based on changes you plan to make (e.g. pay off balances, take out a loan, miss a payment, etc.)

Monthly Credit Scores

The following free services offer you a look at your VantageScore monthly:

• CreditSesame.com: Get your updated score each month along with additional services.

• LendingTree.com: Each month, check your free score with an evaluation that helps you learn more about your potential savings.

• Nav.com: The only place to get free credit scores from all three of the major consumer reporting agencies, Nav offers you a free credit score along with alerts for credit report changes. Additionally, if you are a business owner, Nav offers free access to your business credit scores.

Immediate Steps for Protecting Your Credit History

The first step to protecting your credit history is to access it. If you have not done so in the past seven days, pull your credit report for free with no credit or debit card necessary at AnnualCreditReport.com. This is a special arrangement between the consumer reporting agencies, due to the COVID-19 pandemic, through the end of 2020. Normally, you can only access your report once every twelve months.

Review your credit report for inaccuracies and accounts you do not recognize. If you see mistakes or potentially fraudulent debts on your credit report, submit a dispute directly through the consumer reporting agency (CRA) home pages (Equifax.com, Experian.com, TransUnion.com). You must dispute the error with each CRA that lists the problem on your report. They do not share error disputes.

A 2018 federal law gave all Americans the right to freeze their credit reports so that no one may look at or use their credit history without their express consent. If you freeze your credit report, your current creditors will continue to report your payment and usage activity, building your rating as usual. You can thaw and refreeze it at any time in case you choose to apply for another loan or account. However, no one else will have access without your permission, which you give by thawing your credit using your password. Not only can and should you freeze your own credit, but you should consider freezing the credit of any minor children (under 16 years of age) or protected adults under your care.

Above all, stay in touch with your creditors, even if you are struggling with on-time payments. Make sure you know what you can realistically afford to pay beforehand, but you can ask your creditors what hardship programs they have available to you. Note that when creditors offer you the opportunity to skip a payment or two because of hardship, they will not report you as late, but interest will generally continue to grow on your balance.

Long-term Steps to Building or Rebuilding Your Credit Score

In order to accelerate your credit building, consider the following steps:

1. If you receive a stimulus check, use at least a portion of it to focus your debt reduction efforts on your newest credit cards, store accounts, and loans first. Continue to make the minimum payments on all your other accounts, but the faster you can pay down your newest account, the faster you will rebuild your credit score. This is called the Debt Landslide do-it-yourself debt relief method.

2. Find a family member who might add you to their credit card account(s) as an authorized user. You do not need to see or even use the card to benefit from your family member’s good credit. Nor will your credit affect his or her rating at all.

3. Contact your credit union or bank to see if they offer a no-fee secured credit card. Use it just once a month to pay for a small subscription service (e.g. Disney+, Hulu Plus, or Netflix), and then pay it off in full. After 12 months, request that the card be converted to a standard credit card so you can get your savings deposit back.

See our credit building page for additional ideas and details.

Related Questions

How do natural disasters affect your credit report? If your life is directly affected by a natural disaster, you may ask your creditor(s) to add a special comment code to your report noting you were impacted by a natural disaster. This code will prevent that account (both its positive and negative information) from factoring into the VantageScore models. This code, however, will not affect your FICO scores.

Does forbearance affect your credit score? Forbearance means your lender is not actively attempting to collect payments from you. You still own the balance, and interest continues to build on the account. The longer your account is in forbearance, the larger the balance will grow, negatively affecting your credit score.