Crisis is Over, but Credit Blemishes Linger

Nearly one in six Americans experienced an adverse credit event such as a foreclosure, bankruptcy, civil judgment, or federal tax lien during an 11-year period from 2004 to 2015, which has slowed the nation’s economic recovery, according to analysis from Urban Institute.

Authors Wei Li, Laurie Goodman, and Denise Bonsu of the UI’s Housing Finance Policy Center point out that 34.4 million consumers experienced an adverse credit event other than a foreclosure during that 11-year period. While the 7.1 million foreclosures have been often cited as a hindrance to economic recovery, the adverse credit reports have not been talked about much, the authors stated.

“These extensive credit problems are partly responsible for consumers’ slow recovery from the financial crisis,” the authors stated. “The lingering effects of foreclosures and adverse public records prevent consumers from obtaining mortgages and pursuing homeownership, hinder housing market recovery, limit consumers’ ability to obtain other credit (e.g., auto loans), and reduce consumers’ ability and willingness to spend, all of which weakens the economic recovery.”

The total of 41.5 million consumers who experienced an adverse credit event in those 11 years made up approximately 16 percent of the 264 million Americans with a credit record, according to UI. And though the recession ended in 2009, the number of consumers with an adverse event on their credit record actually peaked six years later, in 2015, since these events remain on credit records for many years in some cases.

“Accordingly, many consumers will retain adverse events on their records for years, making it hard for many of them to borrow again,” the authors stated. “We estimate that in 2018, 22.8 million consumers—almost 9 percent of the adult consumer population—will still have a foreclosure or adverse public record.”

The authors found that the majority of these consumers with an adverse credit event still had a low credit score as of 2015. More than half of the 7.1 million consumers with a foreclosure during that 11-year period (3.9 million, or 54 percent) and 64 percent (22 million) of the other 34.4 million with an adverse credit event other than a foreclosure had a VantageScore credit score lower than 620 as of 2015.

The authors found that the concentration of those with negative credit records varied greatly by region, with Nevada topping the list for highest share of consumers with a foreclosure (5.2 percent) and Indiana topping the list for highest share of consumers with another type of adverse credit event (28.7 percent).

“The widespread damage to consumer credit records beyond mortgage foreclosures during the 2008 financial crisis has had a more significant and lasting impact than many have recognized,” Li, Goodman, and Bonsu stated. “Policymakers need to take this damage into account as they design ways to energize the recovery.”