Keeping your credit profile healthy during a pandemic
Credit may not be top of mind for many consumers these days. But as the pandemic and its associated economic woes drag on, they may want to give it some attention.
The good news is that consumers, by and large, improved their credit profile during the pandemic, despite record unemployment and massive business shutdowns.
The support programs that were put in place worked. Helped by federal stimulus payments, expanded unemployment benefits, lender relief agreements and a shift in habits, Americans used less credit, paid down debt, made fewer late payments and improved their credit scores. The average FICO credit score was 711 in July, up 5 points from a year earlier, according to Fair Isaac, the company behind the score. A FICO score runs from 300-850 and is one of the most widely used metrics to determine a consumer’s credit worthiness.
“It definitely feels like many consumers have taken a cautionary step in terms of saving and spending,” said Matt Komos, Vice President of Research and Consulting at credit reporting agency TransUnion. “I think there is a general cautiousness among the American consumer.”
The bad news is consumers’ financial health could be heading for a downturn soon. Some relief measures are expiring or have concluded, Congress has yet to reach agreement on a new relief package; meanwhile the job market and economic recovery remain fragile.
Credit profiles don’t yet reflect those developments. There’s typically a lag time between a major economic event and when it’s reflected in the credit files of Americans.
For example, during the Great Recession, the average national FICO score didn’t hit its lowest point until late 2009, months after the recession officially ended, wrote Ethan Dornhelm, vice president of FICO Scores and Predictive Analytics, in a blog Monday. In the case of the COVID-19 pandemic, it could be a significant lag because of the extraordinary steps taken to help consumers.
TransUnion said it is seeing a slight increase in 30-day late payments, potentially an early indication that borrowers are under financial duress and could default. This measure increased modestly in August for the two largest payments most consumers face — auto and mortgage.
“I think the full impact of the pandemic on their credit isn’t known yet and that is what worries me,” said Paul Golden spokesman for the National Endowment for Financial Education. “Even with good credit and low debt and some savings, after more than six months or potentially going on to a year, few people can withstand that stress.”
Consumers should be
pandemic hit the state. And state economic output also was below its previous peak.
Connecticut lagged the nation both in job and wage recovery over the last decade. And while neighboring northeastern states enjoyed robust growth by fostering growth in information technology-related industries, Connecticut did little to reverse an economy that primarily grew “low-skill, low-wage” jobs in retail, hospitality and elder care, the report states.
“It is clear the state disconnected from the modern data-driven, digitally dependent modern economy, and thus saw weak growth in dynamic, high-wage, high-skill sectors,” Carstensen and Gunther wrote. “Connecticut’s finance and insurance sector—increasingly IT intensive—shrank by nearly a quarter.”
Absent a huge shift in state policy — to one that offers more competitive tax advantages for IT industries and invests in data centers and other related infrastructure — Connecticut can expect to see highpaying insurance and financial services jobs vanish even faster between now and 2030, Carstensen said.
“I would be amazed if we didn’t see it shrink,” he added. “Connecticut has treated data centers as if we could be a competitive economy with gravel roads and ox carts.”
And the low-paying jobs Connecticut has grown also have been among those most susceptible to the pandemic.
The 277,000 residents who were unemployed here in April, the single-largest number — about 74,600 — worked in leisure, such as restaurants and certain types of retail, and hospitality before losing their jobs.
“Operating at only 50 percent of restaurant indoor capacity as well as take-out and patio services will continue to characterize food services, so recovery will necessarily be prolonged,” the report states.
This segment of the economy also is likely to struggle even if a vaccine becomes available in late winter or early spring, the economists wrote, adding many may delay being vaccinated because they fear adverse reactions.
“There is great confidence in the medical community that we will get an effective vaccine, but its politicization has significantly reduced willingness of Americans to take the vaccine, possibly extending yet further the impacts of COVID-19,” they wrote.
Connecticut’s official unemployment rate, which is driven by federal labor surveys, is 7.8 percent, but state Department of Labor officials say the effective rate is closer to 12 or 13 percent.
The UConn center agrees.
Technically, the unemployment rate reflects the number of people without a job divided by the entire labor force — or those adults actively seeking work. When jobless residents are not counted as part of the labor force base, for any reason, the unemployment rate tends to shrink. Conversely, as more jobless residents are counted, the unemployment rate increases.
But for months after the pandemic began in March, state labor officials effectively had not required any residents to demonstrate they were searching for work to qualify for benefits.
Based on the effective jobless rate here, about 65 percent of Connecticut’s population currently is either working or involved in the labor force by actively looking for a job. That number was closer to 68 percent last summer, and 70 percent before the worst of the Great Recession.
State government has weathered the recession better to date, due in large part to surging state income tax receipts driven somewhat by a stock market that has rebounded since an early pandemic plunge.
But Carstensen cautioned against placing too much faith in Wall Street.
Even despite a recent surge in state tax receipts, Gov. Ned Lamont’s budget office is projecting a nearly $1.3 billion deficit in the current fiscal year — a gap equal to more than 6 percent of the budget’s General Fund.
And even if those tax revenue trends continue, the administration is forecasting shortfalls ranging from $1 billion to $2 billion in each of the next two fiscal years.
“Wall Street is increasingly disconnected” from the rest of the economy,” Carstensen said, adding that many major corporations do more than half of their business outside of the United States.
A state budget built on boom income taxes from capital gains, and a population that increasingly relies on retail and hospitality jobs to survive, is destined to fail.
A robust stock market “holds off the reckoning,” Carstensen added, “but a reckoning is coming if we don’t change the trajectory.”