Most Borrowers in Hardship Programs Improved Their Credit Scores, Study Finds

Most people who chose to take advantage of their lender’s forbearance or other hardship programs during the height of the pandemic last year wound up raising their credit scores by this year, according to a study released Thursday.

TransUnion found 32.4 million people in the Chicago credit agency’s U.S. database who had enlisted in hardship programs between April 1 and Sept. 30 last year for a bank card, auto loan, unsecured personal loan or mortgage. Of them, 18.7 million, or 58%, increased their VantageScores from March 31 to Sept. 30, 2020.

“Our research shows that while many consumers were negatively impacted by the pandemic, the majority experienced an increase in their credit scores,” Paul Siegfried, SVP and card and banking business lead at TransUnion, said.

Some of the results from the study might defy expectations, or show the degree to which consumers were motivated to tap the programs more out of excessive prudence or opportunistic redeployment of cash rather than actual financial hardship.

Siegfried said lenders historically have used traditional credit scores that mark a consumer’s position at a specific time. With the introduction of trended data over the past five or six years, he said lenders can see the shifts in behaviors of the consumer over time.

“Understanding hardship behaviors is understanding more holistically what is going on with the consumer,” Siegfried said. “The more you understand about a consumer’s behavior the more you are able to make decisions that are both in the consumer’s and the lender’s best interest.”

The researchers looked at hardship program participants whose score had improved by Sept. 30, 2020 and who opened a bank credit card account from Oct. 1 to Dec. 31 last year. That combination of attributes whittled down the group to 1.3 million hardship borrowers.

The researchers did not publish data on the risk differences found among those whose score declined.

Hardship borrowers were compared to score improvers who abstained from hardship programs entirely last year — a sample they weighted to match the risk tier distribution of the hardship group.

The researchers then looked at the consumers’ credit records six months after opening their credit card accounts to count those who had at least one monthly payment that was late by 30 days or more.

Among borrowers whose scores improved, their performance differed by a key attribute: Those who exited hardship programs by Sept. 30, 2020, those who remained in the program by Sept. 30 or re-entered by Dec. 31, 2020 and those who abstained. They found:

• Among all hardship exiters, 4.8% racked up at least one delinquent payment over six months, compared with 4.9% of hardship remainers and 5.1% of abstainers.
• Hardship exiters also had the lowest delinquency rate among subprime borrowers (those with scores of 300 to 660). Exiters’ rate was 7.4%, compared with 8.7% for remainers and 8.5% for abstainers.
• Among Super prime cardholders (781-850), delinquency rates were small and the differences tiny. Hardship exiters had a 0.8% delinquency rate, compared with 0.7% for both remainers and abstainers.

The hardship borrowers in each credit risk tier were more likely than abstainers to originate new bank cards after their score rose.

“We found that hardship exiters exhibit higher credit use behaviors as they are more likely to have mortgages and have higher utilization,” Siegfried said.