Looking Back at Credit During the Pandemic and Credit Now

COVID-19 and the subsequent pandemic it had triggered had a very irregular impact to credit scores in the US. It was abnormal to say the least. The average US consumer credit score was actually at an all-time high during the pandemic but many lenders and creditors had strict lending parameters due to the economic uncertainty.

The economy was artificially propped up and this is in large part why most standard business practices were thrown out the window at the time. Lending and credit opportunities were also very tight initially since the onset of the pandemic and many consumers and businesses were negatively impacted. Even though the Federal Reserve had artificially propped the economy up via quantitative easing and loose monetary policy, there was still very little actual lending being done until the FED stepped in. Moreover, money wasn’t flowing very freely it was being stored in savings due to uncertainty and fear (for both corporations and consumers).

However, years later as banks are now allowed to begin share buybacks and issuing dividends (due to very successful FED stress tests), lending parameters appear to have loosened and could be heading for tightening again. Whether this will last still remains to be seen since current economic data appears to be very weak. As economic variables change so do lending parameters and flow of money supply.

Back then there was a clearly disjointed relationship between credit scores and the amount of credit being extended in our current credit cycle. The stock market is still holding up (at the time of writing) and there is yet to be any sign of a bear market. However, there is a new emergence that is currently worrying many economists and that is artificial intelligence.

Artificial Intelligence Mania

Credit is currently being gobbled up by big corporations in what appears to be an AI arms race. This could potentially lead to downsides in the near term and economic gripes with losses of jobs and decreasing economic activity. Besides the COVID pandemic the U.S. hasn’t seen a sustained recession in quite a while. And although the FED appears to be lowering interest rates to fight any potential loss in employment (since inflation appears to be back at bay), artificial intelligence’s impact on our way of life and impact to employment still remains to be seen. As everyone races to spend more to compete in this new and exciting field, many are cutting costs by laying off employees that simply aren’t necessary due to LLMs.

Headed for a Recession

Due to exogenous economic shocks and sustained months of job loss it appears that we may be headed for a recession. This recession could potentially have implications on the credit markets and make lending parameters tight once again, even if interest rates have dropped and are lower. During a recessions access to capital becomes harder to acquire and the winners are usually those with available cash.

Value of Credit?

What does this ultimately mean? Consumers are realizing that their credit score is not as valuable as was once thought. Due to this current trend, consumers have begun de-valuing the value of their credit and realize that their score is not as good as gold. Since credit scores no longer have a 1:1 direct relationship with access to credit opportunities, consumers understand that they are still at the whim of a lender if they are to receive a loan or not. Even if rates drop if money isn’t flowing, your credit won’t do too much good for you.