If you put the pandemic aside and look at current economic indicators, it seems that consumers are in a good position heading into 2021. The real estate market remains red hot with offers coming in over the asking price. Experian, one of the Big 3 credit bureaus, reported in October that the average credit score in the U.S. is now at a record 711. That’s up 8 points from 2019. However, there are factors that have bolstered both these indicators that won’t likely continue. Therefore, my prediction is that credit scores will likely decline in 2021.
The Real Estate Market is Riding Record-Low Interest Rates
The real estate market is being supported by record-low interest rates. Anyone that wants to sell is perhaps looking back at the red hot market in 2007 and deciding that getting out now is a good time. Any upward tick of interest rates is likely to decrease prices because buyers' mortgage payments will have a higher interest amount and they’ll be able to afford less. People that want to trade up or buy their first home are making the move now to take advantage of these low rates.
Some sellers of homes are getting out because the pandemic has affected their ability to keep paying their mortgage. They would rather take less on their selling price than risk getting behind in payments or potential foreclosure.
Just as we saw a little over a decade ago, when the real estate market reaches a fervor, it’s usually because it’s being artificially bolstered.
Current Market Conditions Don’t Make Sense
Even real estate agents aren’t making sense of the current market. Given the high unemployment rate (6.7% as of December 4th by the Bureau of Labor Statistics), and the number of business closures in 2020, the real estate market should have declined. So, what’s keeping it going?
According to a report by CNN Business, the economy and credit scores are being propped up by 2 main factors. Government stimulus checks and delayed mortgage payments for homeowners.
Chief Industry Analyst at CompareCards.com by Lending Tree, Matt Schulz isn’t confident that current consumer credit scores are an accurate prediction of the financial condition of consumers in the future.
"The scores will come down," said Schulz. "There is no way, barring significant government stimulus in the future, that unemployment can stay really high and credit scores remain really high. That's not how things work." Schulz agrees that credit scores will likely decline.
Credit Scores Indicate the Past and Don’t Predict the Future
If we once again look back at the Great Recession of 2008, credit scores did not reflect the economic condition of consumers until well into 2009. There is a delayed adjustment in credit scores. If a homeowner misses a payment it takes about a month to affect their credit score. When a homeowner is on a payment program with their lender, it may not affect their credit score at all or for some time into the future.
The lag time of when a credit score is affected is likely to be extended into 2021 because of a new round of stimulus payments. These payments as well as enhanced unemployment benefits and lender accommodations to homeowners so far have kept people from falling behind on their monthly bills.
What We’re Experiencing is Temporary
This devastating pandemic will subside at some point. Hopefully in 2021. But so will stimulus payments, lender accommodations, and enhanced unemployment benefits. And interest rates, lower than any time since data has been recorded by Freddie Mac in 1971, must rise at some point. Mortgage interest rates are currently half of what they were in 2008.
When these factors present themselves, credit scores will likely decline. I predict this will happen at some point in 2021. Even if I am off and this doesn’t occur until later, it will occur.
What You Can Do to Maintain or Build Your Credit Score?
- Keep spending down and try to pay off as much debt as you can.
- Keep your revolving balances (credit cards) under 30% of your limit.
- If you have derogatory marks from a few years ago on your credit report, work with a reputable credit repair company to try and get them removed.
- If you are a renter, work with a company that can add your rental payments to your credit reports to help boost your credit score.
- Keep your current automobile in good working condition. It is far better to spend on maintaining an older vehicle than buying or leasing a new one.
- Find a second income opportunity that you can work on a part-time basis. Adding even a few hundred dollars a month of income can go a long way to avoiding late payments and paying down your existing debt.