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 714.

My prediction was that credit scores would likely decline in 2021. They didn't. They actually went up a little bit. However, the average credit score remained the same in 2022 as it was in 2021. This is the first year in 4 years that the average score didn't go up. Auto finance companies are now in 2023 experiencing a significant increase in repossessions. So, my prediction was off by 2 years. We will no doubt see the impact of Covid, rising interest rates, and inflation affect credit scores this year and perhaps for the next few years as well.

The Real Estate Market was Riding Record-Low Interest Rates

The real estate market was being supported by record-low interest rates. But that has changed. Anyone that wanted to sell and did not, will have a more difficult time selling in 2023. 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.

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. In this case, it was propped up by low interest rates.

Current Market Conditions Don’t Make Sense

Even real estate agents weren’t making sense of the market 2 years ago. Given the high unemployment rate (6.7% according to the Bureau of Labor Statistics), and the number of business closures in 2020, the real estate market should have declined. So, what kept it going? It was the low interest rates. But the party is now over.

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 in the future. The lag time of when a credit score is affected is likely to be extended into 2023 and even 2024.

What We’re Experiencing is Temporary

This devastating pandemic has now subsided. But so did stimulus payments, lender accommodations, and enhanced unemployment benefits. And interest rates, which were lower than at any time since data has been recorded by Freddie Mac in 1971, have now risen. When these factors present themselves, credit scores likely decline.

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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.

This article which was originally posted in 2021 is updated regularly and was last updated in July 2023.