Consumer credit ratings rise as Americans find ways to repay debt: NY Fed

Consumers used extra cash to pay off debt during the pandemic, which triggered higher intermediate credit scores, according to a report by the Fed in New York. (iStock)

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

“Borrowers have benefited significantly from the federal government’s budget transfers and debt-related payment suspensions, and many have seen increases in their credit scores despite the recession,” the authors said.

Through an analysis of Equifax credit data, New York Fed researchers identified how the pandemic changed the economics of American consumers:

Read more about each takeaway in the following sections. You can also sign up for free Experian Credit Monitoring at Credible to see a detailed analysis of your credit score.

WHAT TO DO IF YOU CAN’T MAKE THE MINIMUM PAYMENTS ON YOUR CREDIT CARDS

Consumers paid for credit cards, while other debt balances increased

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

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

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

HOW TO GET A BALANCE TRANSFER CREDIT CARD

Although credit card balances declined at the start of the pandemic, recent data from the Fed of New York show that credit card debt increased in the fourth quarter of 2021. High-interest-rate recycling credit debt could boost utilization rate of credit, which can have a negative impact on your credit score.

If you are looking for ways to repay your credit cards, you might consider opening a personal flat rate loan. Credit card consolidation can save borrowers thousands of dollars in interest charges over time. You can visit Credible to compare personalized loan rates for free without affecting your credit score.

DEBT SNOW BALL METHOD VS. SNOWDER DEBT METHOD: CHOICE OF STRATEGIC DEBT REPAYMENT

Student loan borrowers record highest credit rating increase

While the average credit score rose for all Americans during the pandemic, consumers on student loans saw the most significant credit score increases due to the cessation of payment of a federal student loan. During the tolerance period, student loan borrowers have been reported as current in their payments to credit bureaus.

“This temporary removal of arrears has increased the credit scores of previously delinquent borrowers, especially in low- and middle-income areas where delinquency and bankruptcy were highest before the pandemic,” the authors said.

HOW TAX RETURN CAN IMPROVE YOUR CREDIT

However, borrowers are expected to resume payments on their federal student loans from May, unless the Biden government extends the tolerance for the fourth time. New York-based Fed economists have previously warned that many borrowers could be in arrears when payment defaults expire. After an extended period of delinquency, some borrowers may see their credit scores plummet.

If you are not financially prepared to restart student loan payments in May, you might consider enrolling in an Income-Based Repayment Scheme (IDR), applying for an additional federal deferral, or refinancing a private low-income student loan. Keep in mind that refinancing your federal student debt would make you ineligible for certain protections such as IDR and federal student loan write-off programs.

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

GEN Z CONSUMERS DECIDE TO CHANGE THEIR EXPENDITURE HABITS IN 2022

Bankruptcy has fallen among Americans of all incomes

Finally, economists at the Federal Reserve Bank of New York found that Bankruptcy rates have fallen sharply since the onset of the coronavirus pandemic. While bankruptcy claims “were historically more prevalent in lower-income areas,” the authors said, they have fallen sharply among low-income Americans in recent years.

New bankruptcy declarations, by income

LOAN CONSOLIDATION VS. DEBT SETTLEMENT: WHAT IS THE DIFFERENCE?

This is welcome news for consumers, as filing for bankruptcy can have a lasting negative credit impact. And while bankruptcy is the best strategy for eliminating unmanageable debt, it is not always the case.

If you are considering going bankrupt, you may want to consider an alternative debt repayment plan first:

You can browse current personal loan interest rates in the table below and learn more about debt consolidation by contacting an experienced Credible loan specialist.

THIS IS THE BEST WAY TO REDUCE THE MONTHLY PAYMENT OF YOUR MORTGAGE

Do you have a question about finances, but do not know who to ask? Email the trusted money specialist at moneyexpert@credible.com and your question can be answered by Credible in the Money Expert column.

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