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Why banks are struggling to assess creditworthiness during the coronavirus pandemic

July 07, 2020
4 min read
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It's no secret that banks tighten their approval standards when the economy is in a recession, as well as taking steps like lowering customers' credit limits to reduce their overall risk and exposure.

(Photo by bernie_photo / Getty Images)
(Photo by bernie_photo/Getty Images)

While the ongoing coronavirus pandemic has pushed the U.S. into its third recession of the millenium (following the dot com crash in the early 2000s and the mortgage crisis of 2008), the speed at which things turned south and the sheer number of people affected make this time different. In particular, banks are struggling to determine whether applicants are actually creditworthy.

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Unintended consequences

A new report by the Wall Street Journal highlights a number of problems that were intended to help consumers navigate this difficult time, but are now making it harder for applicants to be approved for new lines of credit, including credit cards, personal loans and car loans.

The first issue is a provision of the CARES Act, the government's coronavirus stimulus bill, that says that lenders that allow customers to defer payments can't report these payments as late to the credit bureaus. Late payments are a very important risk factor for banks trying to decide who to extend credit too, and without that data, banks are struggling to figure out whether a potential applicant has lost their job or is behind on their existing debt.

(Photo by Getty Images)
(Photo by Getty Images)

Related reading: Issuers are cutting credit limits, but here’s what you can do about it

Even if banks did have access to that data, it wouldn't necessarily solve the problem. Most major lenders are making payment deferral options available to all of their customers, whether or not they've lost their jobs or had their hours reduced.

For example, I was given the option to defer payment on my monthly health insurance premiums and credit card bills, even though I've continued to work throughout the pandemic. Deferred payments wouldn't necessarily separate the risky applicants from the safer ones.

Related reading: How to recession-proof your credit score

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What banks are doing

It's going to be much harder to get approved for new lines of credit until either the economy recovers or banks figure out a better way to analyze new applications. In the month of May, banks mailed roughly 74 million credit card offers to people's homes, down from more than 300 million in the months preceding the pandemic.

Of course banks have every incentive to find new ways to approve low-risk customers, and the Wall Street Journal reports that many large lenders are working with credit bureaus and other companies to access alternative data sets that can help paint a more complete picture of an applicant's risk profile. These include whether the applicant has received benefits such as unemployment, as well as cash flow history from the applicant's checking account.

Related reading: Waiting on a credit card application approval? Here’s how I speed up the process

FICO is working to develop an index that will appear next to your credit score and tell banks how your finances are likely to be affected during an economic downturn, while Experian is creating a similar tool using metro-level economic data. For the near future, banks are also likely to favor applications from customers who have checking or investment accounts with them, as this gives them a more complete picture of your financial situation.

Related reading: The surprising reason I was rejected for a Chase Ink card

Bottom line

A rapid economic downturn like the one we experienced earlier this year demands a rapid response, and sometimes that leads to unintended consequences. While loan deferrals have helped many borrowers stay afloat during extended periods of unemployment, they've also made it harder for banks to tell how risky applicants are based on just their credit scores. Lenders are working to compensate for this through alternative datasets but, as is often the case during a recession, credit may not be easy to come by for some time.

Featured image by (Photo by Suradech Prapairat/Shutterstock)

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TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

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Annual Fee

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Recommended Credit

740-850
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Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
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  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023
Best card for premium perks while traveling
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

10XEarn unlimited 10X miles on hotels and rental cars booked through Capital One Travel
5X5X miles on flights booked through Capital One Travel.
2X2 Miles per dollar on every purchase, every day
  • Intro Offer
    Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel

    75,000 bonus miles
  • Annual Fee

    $395
  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    740-850
    Excellent

Why We Chose It

The Capital One Venture X card is one of the best all-round travel credit cards ever launched. Not only is it offering a tremendous welcome bonus, but cardholders can earn tons of miles on everyday spending and receive a 10,000-mile anniversary bonus to boot. Its annual fee is $395, but cardholders can count on up to $300 in statement credits toward travel booked through Capital One Travel each year and other valuable benefits like access to Priority Pass lounges and Capital One’s own growing family of airport lounges.

Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
  • Unlimited complimentary access for you and two guests to 1,400+ lounges, including Capital One Lounges and our Partner Lounge Network
  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023