Loan Zone: Do credit scores offer an accurate picture of risk today?

Traditional methods of risk assessment may not offer a complete picture in the age of COVID-19.

For years, credit scores have been an industry-standard tool-for helping lenders determine creditworthiness. Under normal circumstances, they have provided a reliable indicator of whether a member will repay a loan on time.

But the lending environment today is anything but normal. CU Rise Analytics has been monitoring spending patterns by analyzing data from credit union clients representing more than one million members across the U.S. The results reveal that traditional methods of assessing risk may no longer offer a complete picture in an age where the coronavirus pandemic has changed everything.

What Credit Scores Can’t See

Typically, an extended period of unemployment, underemployment or other financial hardship would raise red flags. Late payments, growing debt and new lines of credit might start to appear and clue a lender into potential risk. But under the weight of the ongoing pandemic, a variety of relief efforts—which are greatly needed by many—have produced the unintended consequence of blurring the picture of risk.

 

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