It’s been more than 18 months since COVID-19 took hold here in Canada and credit scores are up – significantly. According to recently report that examined 1 million Borrowell members across Canada, the average credit score increased by 18 points in the past year, from 649 (below average) in Q1 2020 to 667 (fair) in Q1 2021
The question is WHY?
How is a Credit Score Determined?
The primary factors that impact credit scores – by importance – include:
• Payment history
• Credit usage
• Credit history length
• Credit mix
• New credit
What’s Behind the Increase?
While it likely seems counterintuitive that credit scores would actually increase during a global pandemic but there are a number of factors that likely contributed to that increase.
Some of the factors that may have contributed to the increase in credit scores:
COVID Loan Assistance!
Consumers that suffered with employment and income issues due to COVID-19 were able to delay or forgo making payments without those lack of payments negatively impacting their credit by taking advantage of forbearance or loan deferrals that were offered by various lending groups. Add to that the payments that many consumers received in partial replacement of lack of traditional sources of income.
As a result, many consumers were able to keep their payment history steady and defer payments without taking a negative hit to their credit scores.
Credit Card Balances Have Declined!
Credit card balances are lower in 2021 compared to 2020. During that time period, household consumption spending dropped significantly – down 14.7% in Q2 as compared with Q2 of 2020 for the largest year-over-year decline since that data was tracked by Statistics Canada started.
And it’s been those Canadians that have the lowest credit ratings who repaid the most credit card debt during year 1 of the global pandemic as part of the trend of non-mortgage debt repayments according Statistics Canada.
According to a recent Statistics Canada report, the total balance owing for those with credit scores below 640 dropped from almost $15 billion in the fourth quarter of 2019 to under $10 billion in the first quarter of this year. For those with a credit score above 800 the balance went from about $16 billion to $14 billion.
Among the changes that appear to have been caused by the COVID-19 pandemic, including:
• Consumers using government stimulus checks to pay down balances
• Less discretionary spending (travel, eating out, concerts, etc.)
• Economic uncertainty causing consumers to limit big ticket expenditures
Will Improved Credit Scores Eventually Decline?
When there’s a return to normalcy (as least as defined a pre-COVID-19), the expectation is that pent-up consumer demand will take hold with consumers spending more travel, entertainment, restaurants – and that spending will lead to an increase credit card debt, increasing utilization rates which may eventually impact credit scores.
When? It seems likely that credit scores will likely reduce over time even though borrowers, generally speaking, are in a better position now than prior to COVI19. Less household debt means that consumers will likely be in a better financial position to pay their bills on a timely basis – and with that, consumers will use their credit cards less – and those facts will have an impact on consumer credit scores.
Recognizing the impact that credit scores might have on your loan portfolio helps you to make data driven business decisions.
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