The crisis caused by the coronavirus pandemic is wreaking chaos and uncertainty on lives across the planet. Many Americans have been deeply affected by the coronavirus outbreak. Thus, many of you may have a reasonable question about how declining earnings or unemployment could influence your credit score.
The coronavirus pandemic has radically plowed through the U.S. labor market. According to authorities, over 36 million people – about one in seven working Americans – have applied for unemployment benefits. Even if individual states soon begin to relax quarantine measures, as planned, most companies will not soon resume business as usual.
Therefore, we understand possible concerns regarding the correlation between your income and employment and your credit rating. The answer to this question depends on the circumstances and cannot be straightforward. One such factor is that the same actions of dissimilar potential lenders can affect the credit rating variously. That is, the same seemingly negative entry on one person’s report may lead to a downgrade of 20 points and another downgrade of 40 points.
In fact, scoring models have no direct consideration of earnings and employment. You can see that with your own example. Once a year, you have the opportunity to get a free credit report from each of the credit bureaus Equifax, TransUnion, and Experian. Upload your data and make sure you do not find your income or present employment status, just a list of current and previous employers.
The whole point is that credit scoring models like FICO and Vantage Score disregard information regarding your earnings. Moreover, if earnings were included in your credit report, it may not affect your credit rating as dramatically as you expect. Conversely, since credit scores are primarily based on the risk of being 90 or more days behind on mortgage payments over the next two years, even people with high income may have a low credit score if they are constantly behind on their payments, and vice versa, a person with low income who closes their loans on time is more likely to have a high credit score.
So, it is fair to say that lower earnings or job loss during the COVID-19 pandemic will not directly impact your credit score, but it is worth remembering that if you already have a relatively high debt-to-income ratio, you should take care to make timely payments because in FICO credit scoring models 35% of your credit score is determined on payment history. If you have enough money saved up for a rainy day, you are safe.
We understand that a decrease in income or job loss can cause anxiety, the LBC Mortgage team is always here to advise you on all mortgage issues. If you have any doubts about your credit rating, we will assist you and check your credit report, try to increase your credit rating together with appropriate adjustments, and then find the best mortgage program for you. If you are having difficulty making payments on your existing mortgage we will offer to consider restructuring your debt reducing the burden of monthly payments. Give us a call!