The Credit Paradox Of The COVID-19 Recession

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No recession hits everybody equally. As for the COVID-19 pandemic-fueled recession, the difference in the degree of financial pain experienced between the haves and the have-nots has been pretty staggering.

Look no further than the credit markets to see how this dichotomy is playing out.

In a typical recession, both creditworthiness and the supply of credit tend to fall uniformly, as businesses tighten their belts and lenders raise borrowing standards. Conversely, consumer credit card debt tends to rise as consumers lean on credit to make up for potential lost income.

This time around, however, that is not the case.

As Moody’s Analytics pointed out, consumer credit scores—a key barometer of consumer creditworthiness—have actually increased across the majority of economic segments during this recession. In particular, credit scores of consumers looking for auto loans, HELOCs, and home equity loans have increased.

According to Hilary Chidi, Head of Global Credit Risk & Chief Sustainability Officer at TransUnion, a little over 50% of borrowers are considered “prime” today, compared to just 40% in 2007. In other words, relative to 2008, borrowers as a whole are in a much better spot today.

At the same time, overall credit card debt among U.S. consumers fell last year. This is likely due to a number of factors. First, many consumers used their stimulus checks to pay down debt like student loans and credit cards. Second, with many businesses shut down for the entirety of the spring and part of the summer, consumer spending fell proportionately. Those trends have resulted in a record personal savings rate in the U.S. 

On the other hand, there are more consumers flirting with financial ruin than ever before.

This has resulted in a bit of a credit paradox for lenders and creditors: some borrowers are in a healthier position as a result of the pandemic recession, while others are not. Demand for credit is up, yet so is the risk of default.

“There are a couple of different Americas,” said Phillip Rosen, CEO of Even Financial. “There's the younger generations [and] minority communities who have  less of a safety net and less cash saved. And then there's also Americans who are in a pretty good financial place and their employment hasn't been impacted. And which group you fall into really impacts how you're affected.”

According to Rosen, the dichotomy of needs that has risen has created an environment ideal for customized fintech-enabled solutions. And as more technology companies enter the financial services space (such as Apple, Amazon, and Alphabet), the net result will make it easier for loan providers to figure out who needs what kind of service, on a larger scale.

“Financial services require a level of personalization well beyond, say, shopping for a flight, because almost anybody can get on the plane,” Rosen added. “With financial services, however, most loan products are not suited for everybody. So there's more to the personalization than just saying ‘Oh, this is how much it costs and we'll get you there in this amount of time.’ We have to ask ourselves, ‘Ok, who's qualified and who's not,’ in a manner that's very secure as we're dealing with very sensitive data. So it's very hard to do that right, no matter who you are.”

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