What Drove the Growth in Credit Scores
during the COVID-19 Pandemic?

American borrowers have had exceptionally low default rates throughout the COVID-19 pandemic. According to our previous Economic Synopses essay, a significant percentage of borrowers saw a considerable improvement in their credit ratings over those years. Furthermore, the data we analyzed show that the incidence of credit card delinquency in that group of individuals with improved credit ratings began to rise quickly beginning in late 2021.

This blog post investigates the rise in the proportion of people with higher credit scores. It breaks down variations in this variable into “creation” and “destruction” of good credit during the last two recessions. The findings point to the importance of the factors driving the rise in credit ratings over the pandemic years.

We use data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel to estimate the proportion of the U.S. population ages 20 to 64 who have a good credit score for each quarter. To evaluate the evolution of credit scores during the Great Recession, we first create a balanced panel, which means that we limit the samples to individuals who have all their credit score data from the first quarter of 2005 to the fourth quarter of 2011. Similarly, we restrict the samples to people who have all their credit score data from the first quarter of 2017 to the third quarter of 2023 to study the evolution of credit score throughout the COVID-19 pandemic.

The credit scores are then adjusted for seasonality and age. The proportion of people with “good” credit is calculated as the proportion of the population above the adjusted credit score mean. See the figures below.

Share of People with a Good Credit Score during the Great Recession

Share of People with a Good Credit Score during COVID-19

SOURCES FOR BOTH FIGURES: Federal Reserve Bank of New York/Equifax Consumer Credit Panel and authors’ calculations.

NOTES FOR BOTH FIGURES: The quarterly data are for individuals who are 20 to 64 years of age. People with good credit score are defined as individuals whose credit score was above the adjusted credit score mean in that quarter. The data are derived from a nationally representative, 5% random, anonymous sample of all individuals with a Social Security number and a credit report. The shaded area indicates the periods that were in a recession.

Breaking Down the Change in Good Credit

The second figure shows a significant increase in the share of people with good credit scores during the COVID-19 pandemic, in stark contrast to no evidence of rising credit scores during the Great Recession and subsequent years, as shown in the first figure. The increase during the COVID-19 pandemic years was slightly less than 5 percentage points between late 2019 and early 2022. The largest year-over-year change reached 3.17 percentage points between the first quarter of 2020 and the first quarter of 2021.

The purpose of the following decomposition is to answer the following question concerning the growth in the proportion of people with good credit scores: Is the share of people with good credit increasing because more individuals who had lacked good credit are experiencing an increase in their credit ratings or because fewer individuals with good credit are experiencing a decline in their credit scores? To answer this issue, we compute the rate of creation and destruction of people with good credit.

We define the creation rate as the number of people who did not have good credit a year ago but now have a good score, divided by the total number of people. Similarly, we define the destruction rate as the number of people who had a good score a year ago but now do not have good credit, again divided by the total number of people. Note that, as defined, “creation” minus “destruction” is equal to the change in the share of people with good credit.

This decomposition is useful because creation and destruction suggest alternative reasons for the increase in the share of individuals with good credit. On the one hand, a higher creation rate of good credit would imply that individuals who would not otherwise have increased their credit scores saw their financial situation change or modified their behavior in a way compatible with a better credit score. Thus, for example, a higher creation rate would be consistent with the narrative that people who accumulated more savings during the COVID-19 pandemic because of government transfer or restrictions on consumption used some of these funds to repay debt.

A lower destruction rate of good credit, on the other hand, would indicate that individuals who would otherwise experience a fall in their credit—as a result, for example, of being late in repaying debt—modified their behavior in a way that allows them to maintain a good credit score. Thus, forbearance programs that permit households to postpone debt payments without affecting their credit score may be more relevant in accounting for a reduction in the destruction rate.

Creation and Destructions Rates Both Played Important Roles in Growing Good Credit

The third figure (below) shows there was a modest decline in the creation rate of good credit and a small rise in the destruction rate during the Great Recession and following years, which explains the small fall in the percentage of people with good credit during those years (as shown earlier in the first figure).

During the COVID-19 pandemic years, however, the creation and destruction rates moved in opposite direction than in the previous recession. As the fourth figure displays (below), the creation rate climbed by 1.3 percentage points from early 2020 to early 2021, while the destruction rate decreased by more than 1.6 percentage points during that same period. The changes added up to a large rise in the proportion of people having good credit. Thus, creation and destruction account for similar shares of the rise in the fraction of people with good credit during the pandemic years.

Destruction and Creation Rates of Good Credit during the Great Recession

Destruction and Creation Rates of Good Credit during COVID-19

SOURCES FOR BOTH FIGURES: Federal Reserve Bank of New York/Equifax Consumer Credit Panel and authors’ calculations.

NOTES FOR BOTH FIGURES: Quarterly data are for individuals who are 20 to 64 years of age. People with good credit score are defined as individuals whose credit score was above the adjusted credit score mean in that quarter. The data are derived from a nationally representative, 5% random, anonymous sample of all individuals with a Social Security number and a credit report. The shaded area indicates the periods that were in a recession.

Overall, the data show that the sharp rise in credit ratings for those with good credit during the COVID-19 pandemic differed significantly from what occurred during the Great Recession. Furthermore, by breaking down the changes in good credit into creation and destruction, our analysis suggests that these two reasons offered to explain the rise in credit ratings are likely both equally valuable.