Has the Pandemic Ruined Your Credit Score?
The current economic state of the world is bleak. There have been many discussions of the economic impact from COVID-19, but mostly on a macro-scale: millions of employees out of work; industries struggling to stay in business; small business loans and stimulus checks.
Most of the discussion of the pandemic has been focused on physical health outcomes – how many infections, how many hospitalizations, how many deaths? That’s to be expected, and the answers are unbelievably tragic.
For the purpose of this blog, I want to talk about what isn’t widely discussed and has been largely ignored: the economic impact at a personal level.
Nobody budgeted for a world-wide pandemic. Nobody planned for an extended work furlough of 6-8 weeks or more.
Experts recommend having 6 months of emergency savings, even though very few people maintain that in practice. Even those that did may be finding that the economic impacts of the Covid pandemic have eaten through those savings faster than they imagined. 51% of Americans have tapped into their emergency savings funds.
So what are individual people doing to make ends meet?
Tapping into 401(k)s
Employees are borrowing from their 401(k) and other retirement accounts at record rates. 14% of Americans with retirement savings, both working and unemployed, have already tapped into those funds.
That likely means they withdrew funds while markets were down, and the long term investment impact of not having those retirement funds available for compounding interest could be enormous.
They are likely not making new contributions to their retirement accounts now either, if they are repaying a 401(k) loan, which is only digging the hole deeper.
Maxing out credit cards
Employees are maxing out their credit cards to cover expenses. If one or more income earners in the family are experiencing reduced wages, credit cards are the simplest and quickest way to pay for items that are needed now. However, without adequate income coming in to offset these charges, employees may be incurring expensive credit card debt that will take a long time to pay off.
In 2019, 50% of Americans were already maxing out their credit cards every month.
Now, according to a study from LendEDU, nearly 70% of those who lost a job because of coronavirus are taking on more credit card debt than planned. Of those who have had their work hours cut, more than 60% are using credit more. Even 37% of those whose job remains unchanged are relying on cards more.
Home equity loans
Employees are requesting home equity loans in record numbers to pay for their daily needs. So much so that banks are now projecting home values could decline by 20% while the unemployment rate could continue to climb.
Additionally, with the forbearance inclusion in the CARES Act, forbearance requests have reached 3.8 million, according to the Mortgage Bankers Association.
Employees are seeking rent relief from landlords and mortgage relief on their homes. 1 in 3 Americans will miss rent due to COVID-19.
Even with the rent and mortgage relief packages, this creates a band-aid scenario instead of a solution to the problem. Catching up on these payments (with all of the other missed payments many will incur) will likely be impossible with a greater, looming debt cycle ahead.
Avoiding other “less important” payments
Employees are making decisions to skip payments on things like their cable bills or credit cards, so they can stay current on their phone bills or car payments. Millions of Americans are skipping these payments as they have no means to pay their bills and continue to put food on the table and keep their families safe.
While these bills–rent, mortgage, cable, credit card, loan repayment, phone bills, etc.–used to take precedence, they now take a backseat.
At the same time, banks and credit unions are tightening their credit screens to protect their own interests, anticipating delays in payments, deferred payments, and increased defaults or bankruptcies among their business and individual customers. Credit limits are being lowered and more loan applicants are being declined.
So what does all of this mean?
Nearly all credit decisions from banks and credit unions are based on your personal credit score. If you have an excellent credit score, you have a better chance of qualifying for loans with a lower rate.
If you have no credit score, or very poor credit, you are likely to be turned down for your loan. The process of applying for credit and being turned down can hurt your credit score further.
Talk to me about credit scores
Credit scores are based on a person’s recent financial history. The credit agencies look at things like your :
- Debt to income ratio
- Available balance on your credit cards
- Late or missed payments
- Previous loan applications
All of the employee behaviors to make ends meet during the pandemic are likely to have a negative impact on employee credit scores. And banks and credit unions, at least in the next 6-18 months, are going to be more stingy with making loans, raising credit card limits, refinancing loans, etc. They will likely decline more people with marginal credit scores, who they may have approved 3-6 months ago.
The worst part is that the path to rebuild your credit score can be very difficult. Missed payments or late payments can stay in your credit history for years, and have a negative impact on your credit. And if you get behind, it’s hard to catch up – especially if no one is willing to make you a loan, because of your poor credit score.
Employees who made all the right decisions and had perfectly healthy credit scores may be in a very different situation when they come back to work post-Covid. They may have never had significant issues before with access to credit, but are facing those challenges now.
If there was ever a time for employers to figure out how to help their employees in need, it’s going to be over the next 6-18 months…
TrueConnect is a voluntary financial wellness benefit that puts employees first. TrueConnect allows employees to access affordable, low-risk loans without the need of a credit score.
TrueConnect was designed to help promote financial health starting in the workplace so employees are able to focus more on their job and less on personal financial troubles at home. It costs nothing for the employer to implement and can be entirely automated through payroll deductions.
To learn more about the benefits of implementing a financial wellness program like TrueConnect within your organization watch our OnDemand webinar.
The opinions expressed in this article are the author’s own and do not reflect the view of our Issuing Partners.