Do Credit Scores Offer An Accurate Picture Of Risk Today?

Traditional methods of risk assessment may not offer a complete picture in the age of COVID-19.

For years, credit scores have been an industry-standard tool-for helping lenders determine creditworthiness. Under normal circumstances, they have provided a reliable indicator of whether a member will repay a loan on time.

But the lending environment today is anything but normal. CU Rise Analytics has been monitoring spending patterns by analyzing data from credit union clients representing more than one million members across the U.S. The results reveal that traditional methods of assessing risk may no longer offer a complete picture in an age where the coronavirus pandemic has changed everything.

What Credit Scores Can’t See

Typically, an extended period of unemployment, underemployment or other financial hardship would raise red flags. Late payments, growing debt and new lines of credit might start to appear and clue a lender into potential risk. But under the weight of the ongoing pandemic, a variety of relief efforts—which are greatly needed by many—have produced the unintended consequence of blurring the picture of risk.

Through the CARES Act, stimulus payments and enhanced unemployment benefits have helped keep many Americans afloat. Borrowers with federally backed mortgages and student loans who are directly or indirectly suffering hardship due to COVID-19 can request forbearance from a lender for up to a year. Many lenders, including credit unions, are implementing their own relief efforts as well, which include auto and personal loan deferrals and skip-a-payment programs. If a loan is current at the time relief is granted, it remains reported as current until the forbearance or deferral period is up.

These efforts have helped suppress delinquencies and defaults and ensure that a member’s credit report and credit score aren’t negatively impacted by pandemic-induced hardship. They have also obscured key insights for lenders who have an obligation to understand a member’s financial circumstances and responsibly extend credit.