Mounting Unemployment: COVID's Ominous Fallout on Credit Scoring

Published on May. 07, 2020

To fight the COVID-19 pandemic, governments all across the globe enforced social distancing protocols. All non-essential businesses stopped operations and closed their doors to the public, leaving many individuals in precarious positions regarding their state of employment and others simply unemployed. 

Over the past two months, unemployment in the United States has skyrocketed. In the last week of March and the first week of April, Americans lost more jobs than they did during the entire 18-month span of the Great Recession. Last week, Americans seeking unemployment benefits increased by 3.8 million, bringing the total nationwide of unemployed to 30.3 million

This surge in unemployment isn’t exclusive to the United States. Unemployment in countries like Spain is expected to reach 20.8% of the population, and many others are anticipating some form of financial fallout in the coming months. With unemployment on the rise, there will be ripples across the whole economy. 

To make matters worse, approximately 49% of Americans live paycheck-to-paycheck, while 53% of American households don’t have an emergency savings account. These numbers are only expected to grow. To soften the blow, the United States enacted a $2.2 trillion stimulus bill, the largest in its history, and yet 1 in 3 Americans missed their rent.

A New FICO Model Amidst The Panic

Fico Score

The Fair Isaac Corporation, the software analytics company behind FICO scores, recently announced its updated scoring model, FICO 10. The model is updated every few years to take into account changes in the economy; the last time it was updated was 2014. 

A person’s FICO score indicates the amount of risk a lender will incur if they extend them a loan - mortgages, auto loans, credit cards and personal loans - it essentially indicates a person’s creditworthiness. Financial institutions may request your FICO score to see if you qualify for a loan, and they may even use it to define the terms of your loan, for example, quoting a higher or lower interest rate. Your credit report can impact your life beyond your finances as well, some employers may even ask to see your credit report when you apply for a job. 

Fico Score Chart

FICO scores are calculated mainly based on five factors: payment history, available credit usage, credit history length, owning different sources of credit, and new credit - which is why checking your credit score might bump it slightly down. Given the current situation, multiple variables will be negatively impacted as the COVID pandemic’s financial strain further develops and unemployment continues to rise.

The new FICO 10 model leverages trended data, meaning that it will hit those who had fallen behind on their loans the hardest by reducing their score more than previous models, while those who kept up with their payments can anticipate an even higher score. But what happens when everyone is late for payments?

Many borrowers are doing what they can by adding a special comment on the consumer credit history (like natural disaster or forbearance) but these measurements are only temporary in nature. FICO has stated that placing borrowers in a temporary deferred payment plan or in forbearance, along with reporting an account status as "current" instead of as "delinquent", would ensure that the customers’ score won't be affected by late payment. 

A Startup’s Crusade During This Storm

Many new startups are trying to change the way we approach credit reports, but none of them stand out like our portfolio company Esusu. The New York-based startup seeks to improve individuals’ overall financial profile by considering a wider breadth of factors, which are often overlooked, in your financial history. 

Esusu Plug and Play Investment

Esusu specializes in software that enables landlords and financial institutions to analyze rental payments as a better way to provide credit scoring. It allows people to create a reliable credit history based on these transactions, enabling those labeled as ‘credit invisible’ to create an opportunity to build wealth and security.

Without a robust credit report, many financial opportunities can be denied. Lenders need data to make informed decisions on a potential client’s creditworthiness, or they may automatically assume they are a high-risk borrower. As a client’s potential risk increases, like in the wake of this epidemic, so do the precautions a lender takes, which is reflected in more stringent loan arrangements. 

We started Esusu on a simple premise, regardless of where you come from, your credit scores shouldn’t determine where you end up in life.

Unfortunately, marginalized or low-income individuals often suffer the most from a lack of credit history, or an unfavorable credit history, thereby perpetuating their circumstances - a vicious circle.

According to Abbey Wemimo, co-founder of Esusu,“we started Esusu on a simple premise, regardless of where you come from, your credit scores shouldn’t determine where you end up in life. Our goal is to tear down barriers and create more opportunities for millions of Americans.” 

Esusu provides a gateway to better financial stability and resilience by factoring in more aspects of your financial history. Not only do they help build your credit score, but they also show a marked increase in on-time payments landlords receive by establishing a rewarding incentive. 

A New Hope: The Emergency Rent Relief Fund

In response to the massive blow thousands of Americans are experiencing, Esusu launched a charitable Emergency Rental Relief Fund. With it, Esusu plans to offer real-time rental assistance - thereby supporting renters within their network and allowing them to make rent, preventing damage to their credit score. 

All funds will be deployed directly to help renters impacted by coronavirus keep a roof over their heads. 

Within just two weeks since the launch of the fund, Abbey and Samir, the co-founders of Esusu, have already met and exceeded their public crowdfunding goal of $25,000 reaching $179,000! 

We created this Emergency Rent Relief Fund to act quickly to raise the funds needed to help families stay in their homes during this crisis. 

“Millions are losing their jobs and we estimate that 65% of renters on Esusu’s platform are directly impacted by COVID-19 and will not be able to make their monthly rent obligations this month. We created this Emergency Rent Relief Fund to act quickly to raise the funds needed to help families stay in their homes during this crisis, ” mentioned Samir Goel, co-founder of Esusu.

If you would like to support Abbey and Samir in helping thousands of Americans that are being hit the hardest by the  COVID-19 pandemic, you can make a contribution here

Only time will tell the extent of the economic impact the COVID pandemic will leave in its wake. As unemployment continues to mount and social distancing protocols extend, businesses brace for a decrease in spending while individuals prepare themselves for an extensive recovery period and how these turbulent times will have a long-lasting impact on people’s credit score and their ability to recover, but at least startups are doing their part to make the new normal less of a burden.

At Plug and Play’s Insurtech accelerator we match large corporations with top-tier startups that are changing the future of the insurance industry. Join our platform today.