While credit scores remain strong compared to the Great Recession, this may not be the case moving forward. The continued financial strain the COVID-19 crisis is putting on Americans makes their credit ratings vulnerable.
In fact, just last week the US Department of Labor reported 281,000 COVID-19-related layoffs — and that could just be the beginning. According to the latest U.S. Private Sector Job Quality Index report, it is estimated that over 37 million jobs from the private sector may be vulnerable to potential layoffs in the short term.
In the midst of this pandemic, which has impacted countries worldwide since last month with almost 400,000 cases, the U.S. government has taken extreme measures to prevent the situation from worsening.
With states locking down curfews for the foreseeable future, as well as shutting down non-essential business operations to lower the risk of contagion, the government has responded with different actions to help the general public stay afloat. This includes implementing flexible unemployment application guidelines, temporarily waiving payments on utility bills, and freezing debt collections on both medical and utility bills for the next 30 days.
However, it’s not clear how this will affect consumers’ credit scores. In the normal run of things, having a late or missed payment on your record can make your credit score drop by as much as 110 points. And while getting forbearance or deferment from your lender won’t affect your score directly, the fact will be noted on your credit report.
As a result, members of the Senate Banking Committee have proposed a bill to safeguard the public’s credit scores, which may be at risk as the outbreak continues.
“During these uncertain economic times, Americans shouldn’t have to worry about their credit scores as they work to make ends meet,” said Senator Sherrod Brown, D-Ohio, who proposed the legislation. “This is an important fix to ensure Americans can focus on staying healthy and supporting themselves and their families, not worrying about accessing credit in the future.”
If approved, the proposed bill would protect credit scores for those affected directly or indirectly by COVID-19 for up to four months, as well as provide unlimited free credit reports and scores for one year after the outbreak. These protections would be extended in the event of future major disasters to safeguard the public.
“Protecting credit scores now will give people a chance to rebuild their lives and our economy,” said Senator Brian Schatz, (D-Hawaii), who co-sponsored the bill.
While it’s still unclear how financial institutions will be affected if the bill is approved, credit reporting agencies, like TransUnion, are supporting banks and creditors that implement hardship programs for consumers. These include pausing reports on negative activity, such as missed payments and extended forbearance.
“In this difficult situation, TransUnion is grateful for the leadership of federal and state regulators,” said Eli Peterson, senior vice president for public policy and privacy at TransUnion. “We know this is a hard time for people, and we are ready to do our part to help consumers.”
For those with mortgages, the federal government announced that lenders affiliated with Fannie Mae and Freddie Mac will suspend mortgage payments upon request for up to 12 months for borrowers in need of financial assistance. Additionally, foreclosure and evictions (including for FHA-backed loans) are to be suspended for 60 days.
As for federal student loans, the US Department of Education announced that they will be giving borrowers the option to request forbearance without accruing interest for up to 60 days. Payments for any borrower more than 31 days delinquent as of March 13, 2020, or who becomes more than 31 days delinquent, were also suspended effective immediately.
Other steps taken by financial institutions to help relieve financial distress amongst consumers and small business owners include fee waivers, broader access to hardship programs, and after-hours support.