Loan delinquencies could be early sign of economic trouble: report

Many Americans who saw their credit scores go up during the pandemic are delinquent on the loans and lines of credit they took out, spelling possible trouble for the economy.

Current delinquency rates on loans opened in mid-2021 more closely resemble borrowers with credit scores 25 points lower on credit cards and personal loans, while the delinquency rates on auto loans opened at the same time more closely resemble credit scores 10 points lower, according to a Wall Street Journal report on Wednesday.

The troubling rise in delinquency comes amid heightened fears over a recession as the Federal Reserve has continued to aggressively raise rates, with the higher rates and increased price of goods putting strain on household budgets across the country.

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Credit scores for many Americans rose sharply during the pandemic, who benefited from programs such as student loan and mortgage payment pauses while receiving an influx of stimulus payments. Much of that money went to savings and paying off debt, especially with widespread closures limiting how much Americans were spending on travel and dining out.

According to an analysis by Intuit Credit Karma, over 25% of borrowers with credit scores below 600 at the beginning of the pandemic saw their scores rise to "near-prime" scores, which is defined as between 620 and 659, by mid-2021. Across all borrowers, the average increase in credit scores was 88 points during the same time period.

Now, many of those borrowers have seen their scores slip back, with 38% of those that saw their scores rise into near-prime falling back to "subprime," which are scores defined as between 580 and 619. 

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Lenders have long relied on credit scores to gauge the likelihood a borrower will repay a loan, but the unique conditions of the pandemic have made the scores a less reliable metric. Brendan Coughlin, who is the head of the consumer-banking division at Citizens Financial Group, told The Wall Street Journal that scores "were artificially inflated" by the pandemic.

However, lenders were prepared for the skewed numbers, according to Coughlin, who said Citizens Financial Group started relying less on credit scores to evaluate prospective borrowers, including investing in advanced internal models and analytic tools to better rate risks.

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"In a normal economy, you probably would have seen a few more folks kind of tip over," Coughlin said. "We needed more information to have confidence in how we were underwriting."