The average consumer credit score has gone up during the pandemic, an unexpected positive side effect on personal finance from relief efforts and changes to everyday life.
On Monday, the Fair Isaac Corp., which markets the proprietary algorithm used by the three major credit bureaus to determine the most commonly used credit score, known as FICO, reported that the average credit score now stands at 711, a full five points higher than a year ago.
The FICO score ranges from 300 to 850 and is widely used by banks and lenders to determine a consumer’s credit risk. A lower score may mean a borrower has to pay a higher interest rate or put more money up front — or even be shut out of a loan, credit card or financial product entirely.
Several factors go into determining a credit score, with one of the most important being a borrower’s credit utilization ratio. And that’s where the coronavirus comes in.
For families that weren’t among the worst off, the pandemic brought credit relief in three major ways that allowed them to pay off their debts faster: They were able to use part of their stimulus checks. They saved money by not going out for dining, traveling or recreation. And rock-bottom interest rates let them refinance their homes and lower their monthly payments.
All three of those things benefited Evelyn Cox, 40, of Utah, mother of two.
At the beginning of 2019 she was staring down a household debt of over $20,000. In the past few years, both she and her teenage daughter had car accidents. They weren’t hurt but the cars were totaled and when she went to replace them the loans were more expensive then she expected.
“I felt like we’re hanging on by a thread year after year, and I can’t deal with the stress,” Cox told NBC News.
That’s when she decided to take action and get the family’s finances in order. Her husband works in customer service and she does medical transcription and odd jobs to pick up extra income, like selling items on eBay, and working for DoorDash. Between the two of them they gross $45,000 a year. On that income and with two teenagers, one of whom has special needs, tackling their debt wouldn’t be easy. But she got to work.
She printed out a poster-board chart of her credit score and debt and put it up in her bedroom. She put the whole family on a budget and started paying down debt. Then the pandemic happened.
“Initially we were all overwhelmed and all at each other’s throats,” Cox said. But there were some unexpected upsides.
The family was able to use most of its stimulus payment to pay down their debt, she said. They made most of their meals at home, saving more money. With school going remote, she no longer drove her son to a far-off school that met his needs, saving on gas. Vacation money also went toward paying off debt. Then she and her husband refinanced their mortgage, reducing the term of their loan and their monthly payments. Everywhere they saved, Cox plowed most of the money into paying down their debt.
And month by month the lines on the chart in her room got better and better, with the debt going down and their credit score going up. It was “a huge motivating factor,” Cox said.
Now she’s debt free, her credit score is an excellent 800, and she’s working on both building an emergency fund and learning how to invest.
With the household finances in a more comfortable spot, she is now able to reach out more to help others, including giving more frequently and more generously to those in need.
“It feels incredible,” Cox said. “The peace of mind is worth so much more than the financial gain. I wish we’d done it years ago.”
She’s not alone.
“Borrowers are prioritizing their credit health with the hopes of qualifying for the super low interest rates on homes, cars,” Farnoosh Torabi, a financial expert and host of the "So Money" podcast, said in a message. “There is a cohort of consumers that very intentionally worked on credit repair and credit health to help increase their chances for low rates.”
Financial pros say there has also been specific relief offered in the coronavirus relief legislation that has helped consumers stay current with their creditors, improving their scores.
“Even if cash-strapped consumers aren't currently paying their credit accounts, as long as they have an agreement in place with their creditors — like auto finance firms, student loan companies or credit card issuers — then those businesses are likely still reporting nonpaying customers as having accounts ‘paid as agreed,’” Lynnette Khalfani-Cox, a personal finance expert, said in an email.
“This is consistent with the relief provided in the CARES Act, and just having credit tradelines or accounts reported as 'current' or 'paid as agreed' maintains or improves a person's credit scores,” Khalfani-Cox said.
While improving a credit score may pale in significance to the global issues the world is facing, it does give consumers more options, said Ted Rossman, a credit industry analyst for CreditCards.com.
“Even if you’re not in the market for a credit card, mortgage or car loan right now, you very well could be in the next several years. Aside from loans, many apartment rentals, cellphone plans, utility subscriptions and even some job offers involve credit checks."
Every silver lining has a cloud too, though, and U.S. consumers can still be in for some dark days.
“There is a bit of a lag between when a major macroeconomic event occurs and when the FICO score reflects that,” wrote FICO VP Ethan Dornhelm.
For the millions of Americans who are out of work, falling behind on their bills and maxing out their credit cards, their FICO scores will eventually drop. During the Great Recession of 2007-09, credit scores didn’t hit their lowest point until months after the crisis officially ended.
For some consumers battling Covid-19-induced hardship, government relief and assistance programs are ultimately delaying the inevitable blow to their credit rating.
“In the case of the Covid-19 pandemic, the lag between the onset of the pandemic and when credit files begin to show the financial strain that millions of Americans are feeling is further affected by the significant steps taken by both the government (stimulus spending) and private sector (lender payment accommodations) to help consumers ‘bridge the gap,’” Dornhelm wrote.