The jump that many Americans saw in their credit scores over the past three years may be painting too rosy a picture of their financial health, according to a new study.

Millions of consumers “dramatically” boosted their scores early in the pandemic, thanks to financial support from the government, research by credit reporting firm TransUnion shows. That helped ease lending standards and drive growth in card issuance, auto loans and other types of credit.

But now, with the cushion of Covid stimulus almost gone, borrowers who jumped into a higher tier are “likely to fall back into some of the credit behaviors that they had displayed previously,” the study argues. That should make lenders cautious, says Michele Raneri, head of US research at TransUnion.

Stimulus checks and a foreclosure moratorium, along with forced savings as consumers were stuck home in the pandemic, all combined to strengthen household finances. Most of the programs have ended. The freeze on student-loan repayments — one of the last ones still in place — is due to expire in the coming weeks.

In the first year or so after Covid hit, higher savings rates enabled many Americans to clear debts and close down credit accounts. But as the cost of living began to pick up in 2021, they started adding new accounts again.

The TransUnion study found that many of the new credit lines were being tapped by people who’d recently seen their credit scores rise sharply.

‘Less Reliable’
That view is shared by Cristian deRitis, deputy chief economist at Moody’s Analytics. “There is more consumer credit risk in the system than lenders may have assumed, due to credit score inflation,” he says.

In general, loan defaults and delinquencies fell to record low levels during the pandemic, thanks to the financial safety net. Some measures suggest an uptick lately, even though they remain scarce by historical standards.

A recent blog post by data analytics company Fair Isaac Corp. — a pioneer in building credit scores, and inventor of the most widely used version, known as FICO — noted the shift.

FICO scores are good at capturing the relative likelihood that one set of borrowers will keep up with debt payments compared to another group with different scores, but they’re not designed to “provide a specific, fixed estimate of credit risk,” according to Ethan Dornhelm, vice president for scores and analytics.

In the first years of Covid, stimulus plus programs to shield borrowers improved the odds of repayment across the curve of credit scores, Dornhelm wrote. And now there’s “a natural reversion towards repayment rates more aligned with pre-pandemic levels” as the measures are phased out, and the likelihood of repayment at a given credit score is decreasing.

Some lenders are taking all of this into account.

Renaud Laplanche, co-founder and chief executive of Upgrade, says the fintech firm is aware that “credit scores are less reliable and more inflated than they used to be” — so it’s placing less weight on them.

This article was provided by Bloomberg News.