Finicity survey finds over 65% of respondents are worried about their credit score dropping due to pandemic.
The unprecedented economic fallout we experienced at the onset of COVID-19 was devastating and immediate. Millions were laid off or furloughed as lockdowns and physical distancing forced businesses in certain sectors to limit operations or close indefinitely. But stimulus relief, payment holidays and rent/loan forgiveness policies seem to have masked or delayed the credit crisis we feared early on. In fact, the average FICO score actually went up from 708 to around 711 between April and October 2020, according to a Wall Street Journal report.
However, it may be that the worst is yet to come regarding a credit crisis and long-term economic hardship.
According to a survey of 2,000 U.S. consumers Finicity conducted last November, people stated they were just as concerned about their credit in the wake of job losses or financial hardship near the end of 2020 as they were during the initial onset of the pandemic. In fact, more than two-thirds (65%) of respondents said they are concerned their credit score will go down in the next six months because of the pandemic.
Why is this? It’s because credit scores are a lagging indicator, which means many Americans are right to be concerned over their financial future. The financial relief they’re receiving is only masking the oncoming harsh financial reality.
The truth is — the assistance provided through a stimulus only goes so far. Eighty-two percent of those who received assistance have reported using all or most of the funds. With everyday bills such as groceries and gas always around the corner, as well as other expenses like a mortgage, people are forced to make tough decisions on where their money goes.
And for many, the choice is easy: keep a roof over their family’s head and incur a little more credit card debt in the meantime. A report from bill pay service doxo found the majority of Americans are planning to use their stimulus payments immediately on household expenses, compared to only around 10% who will use the funds to pay off credit card debt.
We know credit scores are important — they help us take out credit and, in part, help us secure loans, buy a new home, purchase a car and finance many other big-decision items. So how can we increase the value and accuracy of these scores, while being cognizant of the current economic state?
For many people, the need for a better credit-decisioning process can no longer be placed on society’s back burner. Finicity’s survey found that nearly three-fourths (70%) of consumers think the need for a better credit review process is more urgent now because of the economic downturn.
And consumers are willing to share more personal information if it means giving lenders a more holistic view of their creditworthiness. This means offering everything from their rent payment history, to utility bills, and much more. In turn, consumers gain more insight into and control over the personal financial information lenders use when they access credit or take out a loan.
Open banking is the path toward more inclusive, more comprehensive risk assessment. Open banking gives people and businesses more control over their financial data. This includes determining how and where third parties — such as fintechs or other banks — can access that information to provide new services. Consumers easily and safely permission access from their accounts to an app that they want to use. Open banking is also designed to ensure transparency, control and security in the financial data experience, empowering consumers and businesses to make better financial decisions.
As much as open banking can enable innovation for fintechs and banks, it also enhances risk assessment and empowers consumers with a more comprehensive determination of creditworthiness. Thanks to accurate, real-time, consumer-permissioned data, open banking augments lagging credit scores with a current, comprehensive picture of consumers’ financial health. This open-banking-powered risk assessment can bolster economic recovery by enabling greater access to financial services for those negatively affected by the pandemic, and for those with thin or invisible credit files.
As we look further into 2021, consumer credit may be a costly casualty of the pandemic-driven downturn in the economy. While monetary aid provides a temporary boost, we could see a sharp decline in credit scores later on in 2021. Banks and financial institutions will need to look past lagging indicators such as traditional credit scores by leveraging open banking platforms to improve the credit process and build a more complete, real-time view of consumers’ financial health. For more information on the credit-decisioning process and open banking, visit www.finicity.com.