Consumer credit scores rise as Americans find ways to pay off debt: NY Fed
Consumer credit scores rise as Americans find ways to pay off debt: NY Fed

According to a New York Fed report, consumers used extra cash to pay down debt during the pandemic, creating momentum for higher median credit scores. (iStock)

The COVID-19 pandemic has had a significant financial impact on many Americans who may have had to deal with job changes, increased child care expenses and soaring home prices. consumption. But despite the challenges, most consumers have improved their credit history over the past three years, according to a new report of the Federal Reserve Bank of New York.

“Borrowers have largely benefited from federal tax transfers and debt-related payment moratoriums, and many have seen their credit ratings improve despite the recession,” the authors said.

Through an analysis of credit data from Equifax, New York Fed researchers determined how the pandemic has changed the finances of American consumers:

Learn more about each takeaway in the sections below. You can also sign up for Experian’s free credit monitoring services on Credible to see a detailed breakdown of your credit score.

WHAT TO DO IF YOU CAN’T MAKE THE MINIMUM PAYMENTS ON YOUR CREDIT CARDS

Consumers paid off their credit cards, while other debt balances increased

The New York Fed has found that credit card debt is the most common debt held by Americans of all income. During the pandemic, many consumers have been able pay off high-interest credit card balances with the help of federal relief measures, such as stimulus checks.

Student loan debt is equally prevalent across all income groups, although mortgage debt is more common among borrowers in higher income areas. Student loan balances have remained relatively stable during the pandemic due to the federal student loan moratorium, which temporarily froze interest and payments on certain types of loans.

Notably, auto loan debt rose dramatically among all Americans between 2019 and 2021, due to “sharp increases in the cost of new and used cars,” the authors said. A recent report from Edmunds found that the vast majority (82%) of car buyers paid above the list price for new vehicles in January. Experts attribute the increased costs to limited inventory and ongoing supply chain issues.

HOW TO GET A BALANCE TRANSFER CREDIT CARD

Although credit card balances fell at the start of the pandemic, recent data from the New York Fed shows that credit card debt exploded in the fourth quarter of 2021. Revolving credit debt with interest rates High interest rates can disrupt your credit utilization rate, which can have a negative effect. impact on your credit score.

If you’re looking for ways to pay off your credit cards, you might consider opening a fixed rate personal loan. Credit card consolidation has the potential to save borrowers thousands of dollars in interest charges over time. You can visit Credible to compare personal loan rates for free without affecting your credit score.

DEBT SNOWBALL METHOD VS. DEBT AVALANCHE METHOD: CHOOSING A DEBT REPAYMENT STRATEGY

Student borrowers saw their credit score increase the most

While median credit scores have increased for all Americans during the pandemic, consumers with student loans have seen the largest credit score increases due to the federal student loan payment break. During the forbearance period, student borrowers were reported current on their payments to the credit bureaus.

“This temporary removal of delinquencies lifted the credit scores of previously distressed borrowers, particularly in low- and middle-income areas where delinquencies and defaults were higher before the pandemic,” the authors said.

HOW YOUR TAX REFUND CAN IMPROVE YOUR CREDIT

However, borrowers will have to resume payments on their federal student loans starting in May unless the Biden administration extends the forbearance a fourth time. New York Fed economists previously warned that many borrowers risk becoming delinquent when the payment pause expires. After a long period of delinquency, some borrowers may see their credit rating plummet.

If you are not financially ready to restart student loan payments in May, you may consider enrolling in an income-based repayment (IDR) plan, requesting an additional federal deferral, or refinancing a private student loan. at a lower interest rate. Keep in mind that refinancing your federal student debt would make you ineligible for certain protections like IDR and federal student loan forgiveness programs.

You can visit Credible to learn more about student loan refinancing, so you can decide if this method of debt repayment is right for your financial situation.

GEN Z CONSUMERS ARE RESOLVED TO CHANGE THEIR SPENDING HABITS IN 2022

Bankruptcies fell among Americans of all incomes

Finally, economists from the New York Federal Reserve found that bankruptcy rates have fallen sharply since the start of the coronavirus pandemic. While bankruptcy filings “have historically been more common in low-income areas,” the authors said, they have declined significantly among low-income Americans in recent years.

New bankruptcy filings, by income

LOAN CONSOLIDATION VS. DEBT SETTLEMENT: WHAT’S THE DIFFERENCE?

This is good news for consumers, as filing for bankruptcy can have a lasting negative impact on credit. And while there are some circumstances where declaring bankruptcy is the best strategy for eliminating unmanageable debt, that’s not always the case.

If you are considering filing for bankruptcy, you may want to consider following another debt repayment plan first:

You can browse current personal loan rates in the table below, and you can learn more about debt consolidation by contacting a knowledgeable loan expert at Credible.

THIS IS THE BEST WAY TO REDUCE YOUR MONTHLY MORTGAGE PAYMENT

You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.

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