Americans’ creditworthiness has improved significantly over the past year, especially for people paying off student loans.
Credit ratings rose, thanks in large part to government intervention to keep households afloat financially during the pandemic a report by the New York Federal Reserve released Tuesday on Americans’ access to credit and debt repayments.
Median loan scores for all income groups had improved since the third quarter of 2021, but student loan borrowers saw the largest increases. Its credit rating rose steadily between early 2020, when the pandemic first hit the US, and the end of the third quarter of 2021.
“Although the COVID pandemic has taken a heavier toll on low-income Americans, our data suggests that most borrowers — including those in low-income areas — have managed their financial obligations and debt repayments,” the authors wrote. “We plan to monitor how lower-income households are enduring the reversal of policy interventions that have improved their financial stability over the past two years.”
Credit scores for high-income student loan borrowers were highest, reaching a median between 700 and 750, according to the report. A credit score of 720 to 850 is considered excellent; Values from 300 to 629 are considered bad.
The three-digit number is an important barometer of financial health, determining how much people pay to borrow money, although some critics have called for credit bureaus to consider “alternative” dates like rent, cellphone bills and utility bills to gain access to to extend credit.
Federal support, including cash injections in the form of stimulus checks and temporary freezes on monthly loan payments, helped improve borrowers’ ability to service their debt, New York Fed researchers said.
Student loan borrowers saw a “greater increase” in their credit scores compared to those without student loans, as many student loan borrowers were allowed to suspend their payments under the 2020 CARES Act. These payments are scheduled to resume on May 1st.
Overall student loan borrowers fared better beginning in the third quarter of 2021, with the proportion of borrowers delinquent on their loans declining due to the student loan repayment pause.
““The financial impact of fading tax breaks and debt moratoria for low-income households will be a key issue to monitor in the coming quarters.””
However, the report found that student loan borrowers in low- and middle-income areas still had default rates three times higher than borrowers in high-income areas.
“Overall, the picture is pretty rosy, but we don’t want to take away from the fact that there are households that are still struggling and will be struggling even more as their student loan payments ramp up,” said a New York Fed researcher.
The report analyzed anonymized data from the credit reporting agency Equifax EFX,
merged with geographic income data from the US Census Bureau’s American Community Survey. It didn’t track payday loans or rent payments.
Other key findings from the report include:
car loans. Due to the sharp rise in the cost of both new and used cars during the pandemic, auto loan balances grew faster than any other type of debt from 2019 through the third quarter of 2021.
foreclosures and bankruptcies. “New foreclosures have declined since the Great Recession, but they have effectively stopped during the COVID pandemic,” the report said. The foreclosure moratorium, coupled with income growth, soaring home prices and low interest rates, also kept foreclosures “near zero throughout 2021.” However, the moratorium ended on July 31, 2021 and interest rates have moved higher. The number of new bankruptcies also fell significantly.
credit cards. While credit card debt was the most commonly held type of debt across all income groups, only about half (50.6%) of low-income borrowers had a credit card, compared to 84.8% of high-income borrowers.
The researchers stressed that the end of government support could have a significant impact on borrowers’ ability to manage their debt. “The financial impact of fading tax breaks and debt moratoria for low-income households will be a key issue to monitor in the coming quarters,” the authors write.
Case in point: The monthly payments for child tax credits that many households received in 2021 ended in December, and after that, more families said they were struggling to pay their bills, according to the Census Bureau’s latest Household Pulse survey.
See also: Department of Education forgives $415 million in student loan debt