Lenders have become more concerned about accurately gauging the creditworthiness of borrowers, given that credit reporting on those who avail of COVID relief doesn’t give them the best picture.
For instance, you could be skipping your monthly payments – or making reduced payments – for a while in a form of forbearance. Does getting coronavirus-related assistance affect your creditworthiness in the eyes of lenders? If you are concerned about the impact, you may also be wondering if there is anything you could do about that.
Reporting on COVID relief creates uncertainty for lenders
Lenders have become more concerned recently about accurately gauging the creditworthiness of borrowers, given that credit reporting on those who avail of COVID relief doesn’t give them the best picture.
“Accounts with a payment accommodation reported will not become more delinquent during the accommodation period,” said Rod Griffin, senior director of education and advocacy at Experian. “If the account is current at the beginning of the period, it will remain current when the period ends, enabling consumers to resume where they left off.”
However, if you were not current going into the relief options, your lender could report you as delinquent until you catch up with the payments due before entering into the relief program.
And it’s not even clear if those who availed of this relief truly need it, in case their income has gone down, for instance, or if they are just tapping into the program.
Lenders use certain codes to inform credit bureaus that you have availed of forbearance or deferral relief options on your loans. The information provided could indicate that you have been impacted by a “natural or declared disaster,” such as the ongoing pandemic.
According to VantageScore, “Some consumers have seen their VantageScore 3.0 and 4.0 scores change as a result of the widespread use of forbearance and deferment codes for consumer loans on which lenders have given payment relief. We have made the decision to make adjustments to our proprietary VantageScore 3.0 and 4.0 model algorithms to minimize the negative impact associated solely with the usage of these codes.”
FICO, however, reports that “every FICO score model is specifically designed to ensure that consumers won’t see their score negatively impacted by credit reporting codes related to entering into these agreements.”
For those whose account status is current, there will be no impact on their FICO score even after the pandemic impact wears out.
Credit reporting bureaus aim to provide more clarity
Credit reporting bureaus are aiming to provide more clarity to lenders so that they feel more confident in making lending decisions in the current environment.
“In the wake of COVID-19, organizations of all sizes are looking for macro insights into evolving economic trends to supplement the data provided in individual credit reports,” said Mark Luber, chief product officer at Equifax. “They also need new ways to work with consumers to strengthen virtual relationships when those customers need it most – when they’ve lost income and need new ways to get back on their feet.”
The credit reporting bureau is now providing lenders with a weekly credit trends report that provides a view on state, local and national trends relating to various loans.
And TransUnion has come out with solutions that “help lenders better understand how consumers and their accounts have been impacted by COVID-19,” a spokesperson said.
These inputs (providing detail on each credit product, the timing of the relief and the account balance) help lenders identify those accounts “receiving special accommodations for consumers currently in relief status.”
In a media release, TransUnion said, “The pandemic is complex, and as each lender-to-consumer arrangement may be different, there is no single, simple indicator of who is affected and who is not. By bringing better clarity, the suite helps ensure each person is reliably and safely represented in the marketplace, allowing businesses to transact with confidence.”
Also, FICO recently unveiled its Resilience Index, which aims to gauge how resilient a consumer will be in dealing with an economic downturn.
How to aid your creditworthiness
Given all these new inputs they are looking at, what can you do to maintain and enhance your creditworthiness in the eyes of lenders?
Equifax’s Luber advises that you should check your credit reports to ensure they are accurate and reflect any relief arrangements you may have made with lenders. If you see anything that is not accurate, you should dispute the information with the lender.
You could also contact the credit reporting bureaus.
“It is a good idea to provide the credit reporting agency with documents showing that the lender or creditor has made a mistake. Consumers can also consider adding a consumer statement to your credit reports to explain their current situation,” Luber said.
Experian’s Griffin said, “If you have accounts with a payment accommodations and no payment is due, use the amount you would put toward that debt to pay down another if you can. When the payment accommodation ends, be sure you comply with the agreement so that the account payments will continue to be reported as on time. Take advantage of new tools to strengthen your credit scores.”
For instance, Experian Boost uses nontraditional input such as your payments on cell phone, utility and cable television payments to potentially aid your credit score. You could also talk to your landlord about reporting on-time rent payments to the bureaus.
Most recently, Experian is also allowing consumers to add their Netflix payments history as input to Experian Boost.