People have monetary issues regardless of their excessive credit score rankings
Despite widespread job loss and financial uncertainty, Americans are doing fine with most actions during the coronavirus pandemic.
Federal aid such as stimulus checks, expanded unemployment benefits and a longer break in repaying loans have even given a certain boost.
Consumers pay off debts and save more than they have in decades. Many take advantage of low interest rates to refinance and lower their monthly bills or to make up for overdue payments.
As a result, credit scores, a general measure of creditworthiness, have improved across the board. According to FICO, the developer of one of the most widely used scores by lenders, the average national credit score hit a record 711 in July.
But that’s not the whole story.
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“While the signs are positive, we are cautiously optimistic in the face of the economic uncertainties created by the pandemic,” said Rod Griffin, senior director of public education and advocacy at Experian.
The prolonged hiatus in repaying certain loans – including government-secured mortgages and federal student loans – gave many borrowers a respite during the current economic downturn.
Credit reports show these loans as current even though borrowers aren’t making payments – and probably can’t afford to.
“On the surface, the consumer credit market is doing pretty well,” said Matt Komos, vice president of research and advisory for TransUnion. “Serious crime rates remain near record lows.”
“However, the performance of these accounts, which are still in the property, will help shape the true picture of consumer credit,” he added. “With many accounts expected to become unavailable between March and May, particularly mortgage accounts, we will soon see the real impact of these programs on both consumers and the credit market.”
President Joe Biden recently extended the federal student loan payment hiatus to at least September. His government has also decided to extend the mortgage indulgence until the end of June.
(Pandemic Unemployment Assistance and Pandemic Unemployment Compensation have been extended to March 14th. Employees who have not exhausted their benefit by that date may continue to receive benefits until April 11th.)
By next fall, I have to imagine that there will be a tsunami of people in need of debt relief.
Chairman of Debt.com
While economists argue that government incentives should fill a gap until the economy picks up and jobs become more available, once consumers get used to not paying certain bills, the money is re-prioritized elsewhere and it’s difficult to regain it. According to Howard Dvorkin, chairman of the financial education website Debt.com.
“By next fall, I have to imagine that there will be a tsunami of people in need of debt relief,” said Dvorkin.
If you’re worried about making ends meet, Dvorkin recommends switching to cash to cut spending instantly and avoid additional credit card debt. Then use additional funds to repay the loans with the highest interest rate – also known as the avalanche method of repaying debt.
TransUnion’s Komos also advises borrowers to contact lenders now to explain the financial bottlenecks that may arise if federal aid runs out.
“We always encourage consumers when they run into a challenging place to be proactive and get in touch – don’t wait.”
Many lenders have shown a willingness to work with borrowers to repay loans, often on a case-by-case basis.
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