The Role of Credit Scores in the Recent Rise in Credit Card Delinquency

Abstract

ments on their credit cards become delinquent. And companies routinely use credit scores to predict a borrower’s likelihood of delinquency or default. American borrowers maintained unusually low default rates throughout the COVID-19 recession and subsequent recovery likely because of several factors, including forbearance programs, limited spending during lockdowns, and substantial government subsidies. As a result, credit scores increased considerably in 2020 and 2021. Credit card delinquencies, on the other hand, began to rise at the end of 2021. This essay sheds light on the relationship between rising credit scores and subsequent increases in credit card delinquencies. We use data from the Federal Reserve Bank of New York/ Equifax Consumer Credit Panel to compute, for every quarter, the share of the US population 20 to 64 years of age whose credit score was below 600 three years ago but was above 600 one year ago. We refer to this group as “people who have recently improved their credit score.” We focus on this group because it allows us to investigate, for example, the delinquency status in 2022 of individuals who improved their credit scores between 2019 and 2021. We next use information from Athreya, Mather, Mustredel-Río, and Sánchez (2019) to categorize US zip codes based on how frequently households experience financial distress.1 The 20% of the population living in US zip codes with the greatest percentage of credit card delinquency is the group we refer to as the “most financially distressed zip codes.” We focus on this sample of zip codes because the authors found that residents in regions of greater financial distress are more adversely affected by economic downturns and react more by reducing their consumption. Figure 1 shows that the most significant increase in the share of people who have recently improved their credit score occurs between the second quarter of 2021 and the fourth quarter of 2022. Because we’re comparing scores from three years ago with those from one year ago, this rise corresponds to people who achieved a score of 600 or higher between the second quarter of 2020 and the fourth The Role of Credit Scores in the Recent Rise in Credit Card Delinquency