Americans’ credit scores have improved markedly over the past year, especially for people paying off student loan debt.
Credit scores have risen, largely thanks to government interventions to keep households afloat financially during the pandemic, according to a report from the New York Federal Reserve released on Tuesday on Americans’ access to credit and paying off debt.
Median credit scores for all income groups had improved in the third quarter of 2021, but student borrowers saw the biggest increases. Their credit ratings rose steadily between the start of 2020, when the pandemic first hit the United States, and the end of the third quarter of 2021.
“Although the COVID pandemic has taken a toll on low-income Americans, our data suggests that most borrowers — including those in low-income areas — have managed their financial responsibilities and debt repayments,” said writes the authors. “We plan to monitor how low-income households are weathering the unwinding of policy interventions that have improved their financial stability over the past two years.”
Credit scores for high-income student borrowers were the highest, reaching a median between 700 and 750, according to the report. A credit score of 720 to 850 is considered excellent; scores from 300 to 629 are considered bad.
The three-digit score is an important barometer of financial health that determines how much people pay to borrow money, although some critics have called on credit reporting agencies to consider “alternative” data like the rent, cell phone bill and utility payments to expand access. to be credited.
Government assistance, including cash injections in the form of stimulus checks and temporary halts in monthly loan repayments, has helped improve borrowers’ ability to service their debts, Fed researchers said. New York.
Student loan borrowers saw a “steeper increase” in their credit scores compared to people without a student loan, as many student loan borrowers were allowed to suspend payments under the CARES Act of 2020. These payments are expected to resume on May 1.
Overall, student borrowers are doing better in Q3 2021, with the share of borrowers in default on their loans declining due to the student loan repayment pause.
““The financial impact of declining tax relief and debt moratoriums on low-income households will be a key issue to watch over the coming quarters.””
However, student borrowers in low- and middle-income areas still had default rates three times higher than those of borrowers in high-income areas, according to the report.
“Overall, the picture is pretty rosy, but we don’t want to downplay the fact that there are households that are still struggling and will struggle even more when their student loan repayments begin,” said a New York Fed researcher.
The report analyzed anonymized data from credit reporting agency Equifax EFX,
merged with geographic income data from the US Census Bureau’s American Community Survey. He didn’t track payday loans or rent payments.
Other key findings of the report include:
Car loans. Driven by steep increases in the cost of new and used cars during the pandemic, auto loan balances grew faster than any other type of debt from 2019 to the third quarter of 2021.
Seizures and bankruptcies. “New foreclosures have declined since the Great Recession, but have effectively stopped during the COVID pandemic,” the report notes. The foreclosure moratorium, coupled with rising incomes, rising house prices and low interest rates, has also kept foreclosures “close to zero throughout 2021”. However, the moratorium ended on July 31, 2021 and interest rates increased. New bankruptcies have also decreased significantly.
Credit card. While credit card debt was the most common type of debt across all income groups, only about half (50.6%) of low-income borrowers had a credit card, compared to 84.8% high-income borrowers.
The researchers pointed out that the end of government assistance could have a significant impact on borrowers’ ability to manage their debts. “The financial impact of declining tax relief and debt moratoriums on low-income households will be a key issue to watch over the coming quarters,” the authors wrote.
Case in point: The monthly Child Tax Credit payments that many households received in 2021 ended in December, and thereafter more families reported struggling to pay their bills, according to the latest survey on households from the Census Bureau.
See also: Department of Education to write off $415 million in student loan debt