Consumer credit scores rise as Americans find ways to pay down debt: NY Fed

Consumers used extra cash gains to pay down debt during the pandemic, prompting higher median credit values, according to a New York Fed report. (one)

The COVID-19 pandemic has had a significant financial impact on many Americans, who may have been struggling with changes in employment, increased childcare costs and rising consumer prices. But despite the challenges, most consumers have improved their credit reports over the past three years, according to a new report from the Federal Reserve Bank of New York.

“Borrowers benefited significantly from the federal government’s tax transfers and debt-related payment moratoriums, and many saw their credit ratings improve despite the recession,” the authors said.

By analyzing credit data from Equifax, researchers at the New York Fed found how the pandemic has transformed American consumer finances:

Read more about each snack in the following sections. You can also sign up for Experian’s free credit monitoring services on Credible to view a detailed breakdown of your credit score.

WHAT TO DO IF YOU CANNOT MAKE THE MINIMUM PAYMENTS ON YOUR CREDIT CARDS

Consumers paid off credit cards while other debt balances grew

The New York Fed found that credit card debt is the most commonly held debt among Americans of all incomes. During the course of the pandemic, many consumers were able to reduce high-interest credit card balances with the help of federal relief measures such as stimulus checks.

Student loan debt is also common across all income groups, although mortgage debt is more common among borrowers in higher-income areas. Student loan balances have remained relatively stable during the pandemic due to the federal student loan moratorium, which temporarily froze interest and payments on some types of loans.

In particular, auto loan debt increased significantly among all Americans between 2019 and 2021, reflecting “sharp price increases for new and used cars,” the authors said. A recent report by Edmunds found that the vast majority (82%) of car buyers paid above sticker price for new vehicles in January. Experts attribute this increase in costs to limited inventories and ongoing problems in the supply chain.

HOW DO I OBTAIN A BALANCE SHEET TRANSFER CREDIT CARD?

Though credit card balances fell early in the pandemic, recent data from the New York Fed shows credit card debt skyrocketing in the fourth quarter of 2021. Revolving credit debt with high interest rates can affect your loan utilization ratio, which can negatively impact your credit score.

If you’re looking for ways to pay off your credit cards, consider opening a fixed-rate personal loan. Credit card consolidation has the potential to save borrowers thousands of dollars in interest costs over time. You can visit Credible to compare personal loan rates for free without hurting your credit score.

Debt Snowball Method vs. DEBT AVALANCHE METHOD: CHOOSE A DEBT PAYMENT STRATEGY

Student loan borrowers experienced the highest increase in credit worthiness

While the average credit score of all Americans rose over the course of the pandemic, consumers with student loans saw the most significant credit score increases due to the federal student loan pause. During the grace period, student loan borrowers were reported as current with their payments to the credit bureaus.

“This temporary elimination of arrears improved the creditworthiness of previously defaulting borrowers, particularly in low- and middle-income areas where arrears and defaults were higher before the pandemic,” the authors said.

HOW YOUR TAX REFUNDS CAN IMPROVE YOUR CREDIT

However, borrowers are expected to resume making payments on their federal student loans beginning in May unless the Biden administration extends the forbearance for a fourth time. Economists at the New York Fed have previously warned that many borrowers risk defaulting when the payment freeze expires. After an extended period of insolvency, some borrowers may see their credit ratings drop.

If you’re not financially ready to resume student loan payments in May, you can enroll in an income-based repayment (IDR) plan, apply for an additional federal deferral, or refinance into a private student loan at a lower interest rate. Keep in mind that refinancing your federal student debt would make you ineligible for certain protections such as IDR and federal student loan forgiveness programs.

You can visit Credible to learn more about student loan refinance so you can decide if this debt repayment method is right for your financial situation.

GEN Z CONSUMERS DECIDE TO CHANGE THEIR SPENDING HABITS IN 2022

Bankruptcies have declined among Americans of all incomes

Finally, economists at the New York Federal Reserve noted that bankruptcy rates have fallen sharply since the coronavirus pandemic began. While bankruptcy filings “have historically been more prevalent in low-income areas,” the authors said, among low-income Americans they have declined significantly in recent years.

New bankruptcy filings, by income

CREDIT CONSOLIDATION VS. DEBT HANDLING: WHAT’S THE DIFFERENCE?

This is good news for consumers, as filing for bankruptcy can have a lasting negative impact on creditworthiness. And while there are some circumstances where filing for bankruptcy is the best strategy to eliminate unmanageable debt, it’s not always the case.

If you are considering filing for bankruptcy, you can first pursue an alternative debt settlement plan:

  • Negotiate with your creditors. Depending on the nature of your debt, you may be able to temporarily suspend your payments, charge a lower interest rate, or pay off the balance with a smaller amount than you owe. For example, mortgage forbearance can grant a short payment relief. Or if you owe a tax debt, you can sign up for a payment plan through the IRS.
  • Seek help from a credit counselor. A nonprofit credit counseling agency can enroll you in a debt management plan (DMP) to help you pay off your debt in fixed monthly installments. Debt counselors may also be able to negotiate with your creditors on your behalf to settle your debt balance, waive late payment fees, and lower your interest rate.
  • Fix debt with a personal loan. It may be possible to lower your monthly debt payments and save money on interest costs by paying off higher-interest debt with a fixed-rate personal loan. You usually need good credit to qualify for the lowest possible interest rates on a debt consolidation loan, although some lenders offer options for borrowers with fair credit ratings.

You can see the current personal loan rates in the table below, and you can learn more about debt consolidation by connecting with a knowledgeable loan professional at Credible.

THIS IS THE BEST WAY TO LOWER YOUR MONTHLY PAYMENT ON YOUR MORTGAGE

Do you have a financial question but don’t know who to contact? Email The Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert section.

Comments are closed.