The COVID-19 pandemic has had a significant financial impact on many Americans who may have had to deal with changes in employment, 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 from 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.
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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 were able to pay off high-interest credit card balances through 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.
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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 pause in federal student loan payments. 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 at 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.
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:
- Negotiate with your creditors. Depending on the type of debt you have, you may be able to temporarily suspend your payments, ask for a lower interest rate, or settle the balance for less than you owe. For example, mortgage forbearance may grant a short period of payment relief. Or if you have a tax debt, you can sign up for a payment plan through the IRS.
- Seek help from a credit counselor. A nonprofit credit counseling agency can enroll you in a debt management plan (DMP) to help you pay off your debts in fixed monthly installments. Credit counselors may also be able to negotiate with your creditors on your behalf to settle your debt balance, waive late fees, and lower your interest rate.
- Consolidate your debts with a personal loan. It may be possible to lower your monthly payments and save money on interest charges by paying off higher interest debt with a fixed rate personal loan. You will generally need good credit to qualify for the lowest possible rates on a debt consolidation loan, although some lenders offer options for borrowers with fair credit.
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.
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