: Here’s what government intervention did to Americans’ credit scores

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Americans’ credit scores improved markedly last year, especially for people paying off student-loan debt.

Credit scores went up, thanks in large part to government interventions to keep households afloat financially during the pandemic, according to a New York Federal Reserve report released Tuesday on Americans’ credit access and debt payment.

Median credit scores for all income groups had improved as of the third quarter of 2021, but student-loan borrowers saw the sharpest increases. Their credit scores were on a steady upward climb between the beginning of 2020, when the pandemic first affected the U.S., and the end of the third quarter of 2021.

“Although the COVID pandemic has taken a heavier toll on lower-income Americans, our data suggest that most borrowers — including those in lower-income areas — have been managing their financial responsibilities and debt repayments,” the authors wrote. “We plan on monitoring how lower-income households weather the unwinding of policy interventions that have enhanced their financial stability during the past two years.”

Credit scores for high-income student-loan borrowers were the highest, hitting a median between 700 and 750, according to the report. A credit score of 720 to 850 is considered excellent; scores from 300 to 629 are considered bad.

The three-digit score is an important barometer of financial health that determines how much people pay to borrow money, though some critics have called for credit-reporting agencies to factor in “alternative” data like rent, cellphone bill and utility payments to expand access to credit.

Government assistance, including cash infusions in the form of stimulus checks and temporary halts on monthly loan payments, helped improve borrowers’ ability to pay off their debts, the New York Fed researchers said. 

Student-loan borrowers saw a “sharper increase” in their credit scores compared to people without student loans because many student-loan borrowers have been allowed to pause their payments under the CARES Act of 2020. Those payments are slated to resume May 1.  

Student-loan borrowers as a whole were faring better as of Q3 2021, with the share of borrowers in default on their loans dropping because of the repayment pause on student loans. 

“‘The financial impact of waning fiscal relief and debt moratoria on low-income households will be a key issue to monitor in the coming quarters.’”

— New York Federal Reserve report

However, student-loan borrowers in low- and moderate-income areas still had default rates that were three times higher than those of borrowers in high-income areas, the report found.

“Overall the picture is fairly rosy, but we don’t want to diminish the fact that there are households that are still struggling and will struggle even more when their student-loan payments kick in,” a New York Fed researcher said.

The report analyzed anonymized data from the credit-reporting agency Equifax
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merged with geographic income data from the U.S. Census Bureau’s American Community Survey. It did not track payday loans or rent payments.

Other key findings from the report include:

Auto loans. Driven by sharp increases in the cost of both new and used cars during the pandemic, auto-loan balances rose faster than any other type of debt from 2019 through the third quarter of 2021. 

Foreclosures and bankruptcies. “New foreclosures have been declining since the Great Recession, but they effectively stopped during the COVID pandemic,” the report noted. The foreclosure moratorium, coupled with income growth, rising home prices and low interest rates also kept foreclosures “near zero throughout 2021.” However, the moratorium ended July 31, 2021, and interest rates have been moving upward. New bankruptcies also declined substantially.

Credit cards. While credit-card debt was the most commonly held type of debt across all income groups, only about half (50.6%) of low-income borrowers had credit cards, compared to 84.8% of high-income borrowers. 

Researchers emphasized that the end of government assistance could have a significant impact on borrowers’ ability to handle their debts. “The financial impact of waning fiscal relief and debt moratoria on low-income households will be a key issue to monitor in the coming quarters,” the authors wrote. 

Case in point: The monthly child tax credit payments that many households received in 2021 came to an end in December, and following that, more families said they’ve been struggling to pay their bills, according to the Census Bureau’s latest Household Pulse Survey.

See also: Department of Education to cancel $415 million in student loan debt

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