The blog of the Urban Institute
February 17, 2021

Americans’ Credit Health Improved during the Pandemic, but There’s More to the Story

February 17, 2021

The COVID-19 pandemic has strained Americans’ financial health. Yet, despite the economic crisis, new Urban Institute research indicates that nationwide and in select cities, people steadily improved their credit health during the pandemic. These data suggest federal, state, and local policy responses to the pandemic may have mitigated some financial damage from the COVID-19 recession.

But credit data do not capture the full scope of financial health. Though forbearance and other policies may have temporarily stabilized credit health, there is reason for concern about other aspects of financial health—such as income, savings, and wealth—as well as credit health once temporary policy measures end.

As the pandemic’s economic effects continue into 2021, families—especially families of color, who face greater systemic barriers to financial security—will need additional support. State and local policymakers can play a key role in improving their residents’ financial health, which, in turn, is closely tied to the financial health of their communities.

Credit health steadily improved from February to October 2020

Economically secure families are better equipped to manage income disruptions like those caused by COVID-19, and credit health is a key part of economic security. Credit can affect people’s access to jobs, housing, and loans.

To assess Americans’ credit health, we measured changes in credit scores, credit use, and delinquencies from February 2020—when COVID-19 was just reaching the US— through October 2020. Since last February, the share of adults with subprime credit scores declined from 24.9 to 22.4 percent. Over the same period, the share of adults with debt in collections declined slightly.

Share of people with subprime credit scores during the pandemic

The share of borrowers with past-due student loans, mortgages, credit cards, auto or retail loans, and alternative financial service loans (such as payday loans) has also decreased during the pandemic.

Bar chart showing the share of borrowers with past-due loans decreased during the pandemic

Pandemic response policies could be helping credit health, but credit data don’t show everything

The CARES Act and related measures allowed qualifying borrowers to seek paused or reduced payments on loans, and if borrowers were current before seeking accommodations, their loans must be reported as current during the accommodation window. Some of the improvement in credit health could be a mechanical reflection of policies like forbearance and the temporary suspension of payments and interest on federally held student loans.

Additionally, credit measures cannot capture the experiences of the approximately 1 in 10 US adults who do not have a credit file. People of color are disproportionately represented in this group.

If families in forbearance have lost income or depleted savings to meet other financial needs, they may still be struggling. Therefore, we cannot discern how long the decline in past-due loans will continue when these protections end. Unemployment claims remain high, and food insufficiency and rental evictions continue to be concerning.

Structural racism puts Black, Hispanic, and Native American communities at greater risk of financial insecurity

Families of color experience greater financial insecurity because of the nation’s history of structural racism: employment discrimination has hindered pay, housing discrimination has limited wealth building, and residential segregation has slowed mobility. As a result, families of color have less wealth and savings, less access to credit, and more expensive credit than white families.

People of color have also been disproportionately affected by the pandemic’s health and economic consequences. They are more likely to die from COVID-19, more likely to be in essential jobs with greater exposure to the virus, and more likely to be in low-wage jobs affected by layoffs.

Even though we found Americans’ credit health improved for all racial and ethnic groups during the pandemic, disparities in credit health persist. Data show that even after credit health improvements during the pandemic, residents in majority-Black, majority-Hispanic, and majority–Native American communities still experience negative credit outcomes, such as delinquencies, and use high-cost alternative loan services like payday loans at rates 1.5 to 3 times higher than residents of majority-white communities.

Bar chart showing majority-Black, Hispanic, and Native communities continue experiencing worse credit outcomes during COVID-19

A study from the JPMorgan Chase Institute also shows that low-income households, which are disproportionately households of color because of systemic barriers explained above, are spending relief payments more quickly than higher-income households.

How state and local policymakers can support residents’ credit and financial health

To stabilize residents through the pandemic and during the economy’s recovery, state and local policymakers should consider what supports will be needed as protections expire and whether some protections can be extended:

  • When forbearance periods end, what supports will borrowers, especially those with depleted savings or low wages, need to stay on track with their repayment plans?
  • How will wage garnishments, tax offsets (for student loans), and other collections penalties affect people who are still struggling financially?
  • Do moratoria on evictions and foreclosures need to be extended? Can states and cities fill any gaps left by the federal moratoria?

To be intentional about improving equity and creating an inclusive recovery, state and local policymakers can pursue the following:

  • provide consumer protections and affordable alternatives to high-cost alternative financial service loans, which are disproportionately used in communities of color
  • help residents get banked to ensure safe and speedy delivery of any future relief payments and unemployment benefits
  • examine and address discriminatory lending practices
  • invest in families and businesses in underserved communities

Though aid has reached some families needing support, additional policies should strive to address structural inequities and ensure all families have the opportunity to be financially secure—during the pandemic and beyond.

People wear protective face masks while shopping at the Union Square Greenmarket as New York City continues Phase 4 of re-opening following restrictions imposed to slow the spread of coronavirus on September 19, 2020. The fourth phase allows outdoor arts and entertainment, sporting events without fans, and media production. (Photo by Noam Galai / Getty Images)

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