Derogatory Marks in Credit Reports Slow Amid Pandemic

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Since the onset of the COVID-19 pandemic, the U.S. economy entered a recession, unemployment reached record highs and many Americans had their incomes slashed. The impact of changing economic conditions, however, has yet to drastically alter consumer credit health in the U.S.

In fact, from January 2020 to June 2020, consumers raised their average VantageScore credit score, reduced their average number of delinquencies and only saw a slight increase in their total debt. Along with experiencing a decline in shorter-term delinquencies, consumers are also showing a reduction in derogatory marks including collections accounts and bankruptcies.

This snapshot of the first six months of the year shows that consumers, on average, have been able to avoid incurring severe damage to their credit. What we see now in credit reports can at least in part be attributed to government stimulus and economic stabilization efforts as well as assistance efforts from private lenders by way of forbearance, for instance.

A Look at Consumer Derogatory Marks During COVID-19

As part of our ongoing commitment to helping consumers manage the impacts of COVID-19, Experian analyzed consumer data to see if the number of accounts showing derogatory marks has changed in recent months. Our analysis is based on a nationally representative sample of Experian’s main consumer credit data. To find the averages used here, we looked at the total number of times each event appears per consumer in our sample size.

Read on for our insight and analysis of consumer credit reports have been affected since the onset of the pandemic. Here’s an overview:

Source: Experian

Average Number of Bankruptcies in Credit Reports Has Declined in Recent Months

Since the beginning of the year, initial research shows that the number of consumer bankruptcies listed in credit reports has fallen, according to Experian data. From January 2020 to June 2020, the average number of bankruptcies listed in consumers’ credit files decreased by 3%. This is a contrast to the same period last year, when the average number of bankruptcies increased by 2%.

In 2010, consumer bankruptcies peaked following the economic impacts of the Great Recession, according to data from the Administrative Office of the U.S. Courts. The process of filing for bankruptcy takes time and is typically a last resort for those who are struggling with high debt because of the substantial negative effect to credit scores. For that reason, it’s still unclear if a similar trend will eventually emerge as a result of the current recession.

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Average Number of Collection Accounts Has Also Fallen

When creditors fail to recoup a consumer’s outstanding debt, they often turn to collection agencies to retrieve the funds. Collection agencies that take up the task of contacting the consumer to retrieve the debt receive a portion of any balance collected as compensation.

From January 2020 to June 2020, the average number of collection accounts per consumer also decreased, shrinking by 4%, according to Experian data. The same period in 2019 saw a similar shift, when consumer collection accounts fell by 3%.

The 1 percentage point increase could be related to creditors granting consumers additional relief measures to help them during this time. With many accounts deferred, and many others under some form of creditor-issued modification due to the pandemic, accounts that previously would have been sent to collections may be experiencing a temporary reprieve.

In addition to any accommodations made by lenders to defer payment on accounts due to COVID-19, additional measures were taken to protect borrowers from collection agencies during the pandemic. The U.S. The Department of Education halted collection of federal student loans, and some states barred debt collectors from garnishing stimulus payment money even if they legally would have otherwise been able to.

When an account is sent to a collection agency, a note of the collection account is listed in a credit report and remains a part of the file for seven years. Collection accounts are considered derogatory marks and can severely impact consumers’ credit scores.

Average Number of Charge-Offs Is up 2%

The average number of unsatisfied charge-off accounts consumers held in June 2020 was up 2% from January 2020, according to Experian data. This growth rate mirrors the growth rate seen in the same period in 2019, and shows that lenders have not shifted their behavior drastically when it comes to closing accounts that are past due.

Charge-offs appear in credit reports after a lender tries—but fails—to obtain an outstanding debt and decides to close a consumer’s account without ever satisfying the balance. Charge-offs often indicate that a consumer’s account was delinquent for at least six months. Unsatisfied charge-offs are often sent to collections agencies.

Average Number of Repossessions Is Down 2%

Since the pandemic began, vehicle repossessions have declined by 2%, according to Experian data. The average number of consumer repossessions shrank by the same amount (2%) during the same period in 2019. This stability in the face of an economic downturn could be due to economic stimulus helping consumers keep up with their auto loans, creditors pausing their repossession efforts, state moratoriums placed on vehicle repossession or other factors.

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Along with repossessions decreasing during this time, overall auto loan delinquency has gone down since the onset of the pandemic. Consumers have reduced their average number of auto loan accounts ever 30 to 59 days delinquent by 1.9%.

A repossession occurs after a consumer goes into default and a lender reclaims the vehicle to recoup outstanding debt. Repossessions are considered derogatory marks, and remain in a credit report for seven years.

CARES Act Protections May Have Slowed Derogatory Accounts

Once it became clear consumers would need financial assistance during the COVID-19 pandemic, a $2 trillion economic stimulus package aimed at dampening the impacts of widespread unemployment and reduced economic activity went into effect. The Coronavirus Aid, Relief and Economic Security (CARES) Act, among other things, gave consumers a temporary cash infusion, laid out protections for those financially impacted by the pandemic (such as by suspending foreclosures), and increased unemployment benefit payouts.

These protections—as well as accommodations made voluntarily by creditors—seem to have been initially effective in protecting consumer credit profiles from delinquency and default. In fact, with these programs in place, some consumers who might have normally entered default may have been sheltered from drastic changes to their financial accounts. This trend may change as aspects of the pandemic relief package continue to expire—increased unemployment benefits payouts expired at the end of July and weren’t fully replaced, for instance.

As Americans continue to manage the effects of the pandemic, the data included in our analysis will continue to evolve. The information included here represents only a momentary snapshot of consumers’ finances. As time goes on, these trends may change. We will continue to publish additional insights as newer data becomes available.

Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO® Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.

FICO® is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.


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