During the early months of the COVID-19 pandemic, when businesses across the U.S. were shutting down and unemployment was rising, something unexpected was happening in households with poor to fair credit ratings. Their credit scores were increasing significantly.

That’s according to a recent report from the Federal Reserve Bank of Boston. In “Credit Scores Since the COVID-19 Outbreak,” Michal Kowalik and Lily Liu, financial economists in the Boston Fed’s Supervision, Regulation & Credit department, and Xiyu Wang, a former senior research assistant at the Boston Fed, set out to determine the main drivers behind this counterintuitive spike in credit scores during a period of “unprecedented economic strain.”

The key finding? Credit scores rose because credit card utilization decreased during the pandemic.

“This effect is most visible for households with the lowest credit scores,” the paper reads. “(T)hese households saw the highest increases in credit scores and the largest decreases in credit card utilization.”

Investigating credit scores during the onset of COVID-19

Credit scores affect a person’s ability to access housing, receive loans, and qualify for certain employers. Lenders use credit scores to judge the likelihood that a person will keep up with payments.

The authors of the Boston Fed report relied on data from the New York Fed Equifax Consumer Credit Panel – an anonymous, representative sample of 5% of all borrowers in the U.S. and their household members. The authors focused on data from March through September 2020, when the largest credit score increases occurred, and when the pandemic was first impacting the economy.

Initially, the economists wondered if the significant credit score increases among borrowers rated poor or fair credit risks were related to certain loan forbearance programs included in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The federal legislation, passed in March 2020, allowed households to pause payments on certain loans – including government-backed mortgages and student loans – without negative impacts to their credit scores.

But their analysis determined that relatively few households participated in the CARES Act’s forbearance programs.

Instead, the authors found that the unexpected spike in credit scores was related to drops in credit card utilization, which measures the proportion of their credit limit a person uses.

Liu added that while some households with higher credit ratings also saw their scores go up, the most drastic changes took place among those with poor or fair credit. On average, households with the lowest credits scores saw increases of about 16 credit score points, while those at the higher end of the “fair” category saw increases of about nine points.

Credit scores may flatten as the economy recovers

The economists’ key finding comes from a series of statistical analyses they created to gauge the relationship between the credit score shifts in their data sample and changes in different household loan categories.

They confirmed that changes in credit card loans are more closely related to shifts in household credit scores than changes in other loan categories, such as auto loans or mortgages, Liu said.

Kowalik said this was also the case before COVID-19.

“In the pandemic, the relationship between credit cards and credit scores is the same as pre-COVID,” he said. “The mechanics are the same. Whether the usage of credit cards increased or decreased, that is what is driving the (changes) in credit scores.”

Liu and Kowalik said that it’s possible some borrowers chose to use stimulus checks provided by the CARES Act and other legislation to pay down credit card debt and boost their scores, but they don’t currently have the data needed to assess that claim.

The economists said that by learning why credit scores increased, they can provide lenders and policymakers with information about what they can expect to see next as the economy recovers from the pandemic.

“You can infer that once the economy starts to grow … these credit scores will either flatten out or maybe decrease a bit as people start seeing their credit card utilization go up, as they spend more and so on,” Kowalik said.

If that occurs, he added, it would mean the relationship between consumers’ credit scores and their ability to pay remains intact.

Read the whole report here.