Though we originally predicted credit health measures such as debt in collections would worsen during the pandemic, some areas showed improvement. In August 2021, about 64 million people with a credit record (about 28 percent of Americans) had debt in collections on their credit report, down from 68 million in 2019. However, whether these improvements will be sustained is uncertain. And though credit health has improved for all groups during the pandemic, racial gaps have persisted.
Pandemic policies helped Americans stay afloat, but many policies will not be sustained
Many policies enacted during the pandemic helped Americans stay afloat. Student loan payments have been frozen since March 2020, providing relief to more than 43 million people. Pandemic policies like mortgage forbearance and other loan accommodations limited new debt collections and helped people improve their credit reports. Stimulus checks and expanded unemployment benefits kept many families from falling into poverty, and enhanced child tax credit payments drastically lowered child poverty rates.
These measures may help explain why the share of people with debt in collections decreased during the pandemic, despite challenging economic conditions. However, the policies were designed to be temporary, and families will have to manage debts and other finances without them. Paused loan payments will eventually resume, bringing back bills people may not be able to pay, especially if they are still recovering financially from health care costs and economic losses from the pandemic. And stimulus payments and expanded unemployment benefits are no longer available, causing a potentially large drop in family income.
Racial disparities persist in debt and financial health
Debt in collections reduces families’ ability to manage other financial needs. Actions to help families weather the pandemic’s financial impact helped ease debt. One report shows 52 percent of households reported using economic relief payments to pay down debt rather than to cover other basic needs.
Still, debt in collections disproportionately burdens families of color, who have historically experienced exclusionary and predatory lending practices. By tracking credit health during the pandemic, we found that while credit health improved for all demographic communities, the gaps between majority-white communities and their more diverse counterparts have persisted.
In 2019, 40 percent of people living in communities of color had debt in collections, compared with 25 percent in majority-white communities. In August 2021, 38 percent of people living in communities of color had debt in collections, compared with 23 percent of people living in majority-white communities. Though both groups saw decreases in debt in collections, the 15-percentage point gap between them remained.
Black and Hispanic adults and adults with low incomes were the most likely to report reducing spending on food or delaying major purchases at the start of the pandemic, indicating acute financial needs. At the start of the pandemic, 33 percent of Black people and 43 percent of Hispanic people reported cutting back spending on food, compared with people 27 percent of white people.
Long-term solutions could improve Americans’ economic resilience
As attention shifts from pandemic response to rebuilding economic resilience, policymakers are weighing long-term solutions to address structural barriers to financial health and help families cope with debt.
For example, the No Surprises Act, which took effect in January 2022, created patient protections that prevent large medical bills due to inadvertent use of out-of-network providers. Medical debt in collections is the most common form of debt in collections, and the law’s protections could influence financial outcomes for Americans who receive medical care going forward. Understanding the law’s effects on medical debt and medical debt in collections could inform further efforts to relieve the financial burdens of health care.
Policies restricting debt types that influence credit reports could also improve credit scores. Preventing medical debt in collections from damaging credit reports could help people when they borrow and when they apply to landlords or employers that use credit reports in their rental and hiring decisions. The largest credit reporting firms are already taking steps to remove most medical debts from reports beginning later this year. While we do not yet know how impactful this credit reporting change will be, removing the bulk of medical debt in collections—which stems from seeking health care, not credit—from credit reports is an encouraging and important step. Changes to credit reporting practices would need to be assessed and to consider potential unintended consequences in how lenders underwrite credit products and provide access to credit. And expanding consumer protections for borrowers could help people avoid predatory loan terms and debt collection practices.
To maximize the benefits of debt forgiveness, policymakers could focus on common forms of debt—such as medical debts—that affect people most in need. Evidence regarding how Americans struggle with debt could help policymakers identify specific populations that would benefit most from policy changes. Our credit health tracker can help policymakers understand what kind of debt is held by the 64 million Americans with debt in collections. With more information, policymakers can make informed decisions and develop efficient, targeted solutions for those struggling with overdue debt.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.