When the COVID-19 pandemic hit earlier this year, the widespread economic fallout and impending job loss were staggering. Almost overnight, millions of Americans faced income loss that made it difficult or impossible to pay bills, credit cards and loan payments. As the crisis continues, consumer credit scores are likely to drop on a mass scale, making it difficult for millions to secure loans and credit needed to make big ticket purchases (such as homes, cars and appliances) that will ultimately help rebuild economic growth.
To better understand the financial impact of COVID-19, Finicity conducted a survey of 2,000 US consumers in June 2020. The survey aimed to help us understand the scale of their financial loss, how it’s impacting their ability to make critical payments and their overall credit health, and whether they believe changes in the credit review process could help. Our new report, Combating the Emerging COVID Credit Crisis, revealed a growing need for an open banking model within the existing lending process, which can help create greater financial inclusion for economic recovery.
Job loss and low credit
At the onset of the pandemic in early March, businesses were forced to close their doors and millions found themselves without work. Unemployment hit an historic 14.7%, the highest since the Great Depression. Our survey found over half (55%) of respondents had either lost their job or had their income impacted due to the pandemic, leaving many behind on bills with no choice but to bridge the gap with credit.
The loss of work and income led to strained finances and hindered American’s ability to pay critical bills, and as a result, 61% of respondents are concerned their credit will be negatively impacted. Nearly all (95%) those impacted said they are concerned about their ability to rebuild their credit or take out a new loan.
The most vulnerable hit the hardest
Respondents with annual incomes below $50,000 are being hit the hardest financially. This group sustained more significant job and income losses during the pandemic with lower credit representation than those in higher income brackets — 62% of those with incomes below $50,000 lost their jobs or had their income impacted during the pandemic, compared to 40% of those with a household income over $100,000.
Compared to wealthier respondents, those making below $50,000 are having increased trouble staying on top of their bills and loan payments. Seventy-three percent of those with a household income under $50,000 said the crisis made it difficult for them to keep up with bills and payments, an abrupt contrast to the 54% of those with a household income over $100,000.
Additionally, lower-income respondents were more concerned about how the pandemic would impact their credit than their wealthier counterparts. Credit anxiety is staggering in this demographic, with 1 in 4 hesitating to rely on credit during the financial hardship, or not attempting to use it at all, as many assume they will not qualify for loans or credit. Over two-thirds (68%) of respondents with incomes below $50,000 said they’re concerned this financial situation will have a negative impact on their credit moving forward.
The ongoing, large-scale job and income loss leaves many vulnerable in the current lending process, and the COVID pandemic is now accelerating the need for a more complete credit review process, something consumers are now also asking for. Nearly two-thirds of respondents (64%) do not believe the current credit rating system gives lenders a complete picture of a person’s creditworthiness.
An overwhelming 82% believe a new, more comprehensive system needs to be established — one that allows more ways for borrowers to prove their creditworthiness. Many cited an expansive list of financial data they believe best represents them and their creditworthiness. Data such as current income, utility, cellular phone, and rent payment history were pinpointed as possible considerations.
Open banking joins traditional crediting
The frustrations the respondents shared are not new, but the COVID-19 pandemic has brought them to the forefront, revealing how urgent changes need to be made to legacy lending processes. To repair the economy, consumer spending must increase, and large purchases such as cars, homes and appliances will drive the recovery. Damaged credit may continue to deter these purchases.
With many Americans lacking traditional credit data, lenders are in need of a new way to better understand a potential borrower’s credibility. Similarly, borrowers need better access to their financial data to better understand their creditworthiness.
The current credit process also leaves lower income borrowers at a steep disadvantage, and a change in this process could lead to better representation and greater equality in the lending market. The solution to the lending market inequality and growing frustration over the existing lending process is the emerging open banking model. This model, in conjunction with traditional credit scores, allows for a more complete credit picture of potential borrowers, giving borrowers more agency over their financial data — paving a way for better financial literacy among individuals and a better economy for all. To download the full report, click here.