WSJ Your Money Briefing - America's Riskiest Borrowers Are Nursing a Financial Hangover

Episode Date: January 6, 2025

In 2024, people fell behind on credit card bills and car payments more often than at any point since the Great Recession. Now, they’re hurting. Wall Street Journal personal finance reporter Katherine Hamilton joins host J.R. Whalen to discuss what borrowers need to know.  Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Here's your Money Briefing from Monday, January 6th. I'm JR Whalen for The Wall Street Journal. Stimulus checks, along with suspended mortgage and student loan payments during the pandemic, allowed many Americans to build up their savings accounts and their credit scores. But since then, reality has set back in. As those pandemic aides went away, a lot of people started feeling like they weren't able to save as much and they also weren't able to keep up with their debts. So especially for people who took on extra loans in 2021, when they were doing better

financially, that really came back to bite them in the butt because they were not able to keep up with those new debts that they had taken on. We'll talk to Wall Street Journal reporter Catherine Hamilton after the break. American's credit scores that skyrocketed during the pandemic are coming back to earth. Wall Street Journal personal finance reporter Katherine Hamilton joins me. Katherine, how have average credit scores trended over the past couple of years? There was a really big jump that we saw during the first three years of the pandemic. And more recently, that jump in credit score has leveled off.

So the average FICO score, which is a traditional credit score measure jumped from 708 in 2020 to 718 in 2023. So that was a record high 10 point increase. And then this year it actually ticked down one point which was the first time it's done that in more than a decade. But that was a big jump in 2021. Why did it go up so much?

There were a few different factors at play in 2021. A lot of folks were actually doing better financially that year because there was more pandemic aid, so the stimulus checks, a lot of people got tax credits that rolled out during the pandemic, and also a lot of people were just spending less during the pandemic because they were staying at home.

And so we saw household incomes go up during that time, and as a result, people were able to catch up on their debt and credit scores increased. How has the economy changed since then? And how has that impacted people's credit profiles? There were a few different factors. Inflation during 2022 really went up and prices increased. And also interest rates went up and made debt more expensive.

And then again, as those pandemic aids went away, a lot of people started feeling like they weren't able to save as much and they also weren't able to keep up with their debts. So especially for people who took on extra loans in 2021, when they were doing better financially, that really came back to bite them in the butt because they were not able to keep up with those new debts that they had taken on. Which groups are being affected by this the most?

The groups most affected, generally speaking, are those with lower credit scores who are known as non-prime credit borrowers, people generally who are lower income, who maybe felt that rise in income more in 2021 and felt like they were doing a lot better who are now coming back to Earth. You and our colleague, David Uberty spoke with financial professionals who help people manage their debt.

What do they tell you is going on? A lot of folks who work in credit counseling and credit consolidation told us that they are getting a lot more clients now who are looking for help, just keeping up with their debts and managing them. There's also a lot of companies like banks and lenders who are seeing it in their bottom line.

So for example, Citigroup said in their recent earnings report that they're not really able to keep up with the earnings because they're seeing this big gap in folks who are behind in paying off their debts that's eating into their revenue. And similarly, Ally Financial, which is an auto lender, they said in their recent call with investors that as consumers are struggling more, they're having to hold on to more cash to cover those loans that people are behind on paying. How does the current level of delinquencies compare to before the pandemic? Delinquencies in general are up compared to before the pandemic.

And similarly, the amount of credit card debt that people are in is larger than it was before the pandemic. When financial professionals look back to the trend of credit scores over the past couple of years, when they look at 2021, do they think we'll ever come back to that? It's hard to say whether we'll see it again, but for now, it's definitely not on an upward slope. So a lot of lenders right now are tightening their standards.

They're lending less to those lower income and non-prime borrowers. And that's partly because during this 2020 and 2021 period, lenders did not have full visibility into borrowers' ability to pay off and keep up with loan payments. So for example, student loan payments were sort of wiped off the credit profiles

during this time, and those are now coming back onto folks' profiles since October. Student loan borrowers now have to keep up with payments or else their credit scores will go down. But during that time, lenders weren't able to see how much that was impacting those borrowers' incomes, and it resulted in a lot of loans being handed out

to borrowers who were not able to keep up with them. What can someone do who is struggling to pay down their debt and wants to get their head above water? One thing a lot of borrowers can do that financial professionals sometimes will recommend is work with a credit consolidator or a debt manager who can reallocate your loans to a debt that you might be

more able to pay off in a timely manner, whether that's getting a better interest rate or a different term that's more well suited for your needs. Beyond that, I think advisors would recommend setting up a budget, maybe getting a second job, but I think a lot of these borrowers are already aware of those and are sometimes already doing those things. And the reality is they took on loans that they were not able to pay off in the long term. And so the answer is unfortunately not very simple.

That's WSJ reporter Catherine Hamilton. And that's it for your money briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy and development producer Aisha Al-Muslim. I'm JR Whelan for The Wall Street Journal. Thanks for listening.