Chi Chi Wu: Recent credit score drops come from Donald Trump's bad policy

Chicago Tribune

6 hours ago

Millions of Americans recently saw their credit scores drop 100 or 150 points, moving them into 'subprime' borrower status and possibly shutting them out of affordable credit, decent rental housing, good insurance rates and even some jobs. What happened to devastate the credit records of 2.4 million Americans, with likely tens of millions more to come? The administration of Donald Trump started reporting student loan delinquencies to the credit bureaus.
Previously, President Joe Biden's Department of Education had put negative credit reporting on hold to provide economic breathing room to millions of student loan borrowers in the aftermath of the COVID-19 pandemic, as well as spiking inflation, skyrocketing rents and other economic stress. The Biden administration had signaled that it would resume credit reporting. However, the Trump administration made the situation exponentially worse with disastrous disruptions to student loan repayment options starting in February, its error-ridden administration of the repayment system and lack of communication with borrowers.
In fact, the 2.4 million borrowers being reported as behind on their loans closely mirrors the 2 million borrowers with languishing applications to enter more affordable repayment plans, which the department abruptly stopped processing in February.
Student loan borrowers aren't the only ones who've seen their financial profiles devastated by the Trump administration. Tens of thousands of federal workers across the country, who have been unjustly fired by the administration and the Department of Government Efficiency, are struggling to pay bills. Farmers are being buffeted by on-again-off-again tariffs, cuts to the United States Agency for International Development and the decimation of other federally funded programs. And the financial pain could spread if we head into a recession triggered by the economic instability caused by the administration.
We've seen this play out before, back in 2008 with the Great Recession triggered by the foreclosure crisis. Millions of Americans lost their homes, their jobs and their good credit reputations. Many never recovered from a cataclysmic event such as a foreclosure that left them in a vicious cycle where bad credit scores (among many factors) kept them from accessing the economic necessities needed to rebuild. Contrast this with the COVID-19 pandemic, when large amounts of stimulus and other economic supports kept credit scores high despite staggering job losses and other economic travails.
There's a myth in the United States that bad credit scores are due to being a bad person — that folks with checkered credit histories are irresponsible, undisciplined, overspending wastrels. But that's far from the truth. Student loan borrowers, fired federal workers, financially stressed farmers and many others did nothing wrong or nothing different when their credit scores plunged. Instead, what changed were the policies set by those in power, who showed no concern about the impact of their decisions on the credit health of millions.
Oftentimes the only sins of folks with poor credit are bad luck and difficult circumstances. People get sick, lose their jobs or just plain run into bad luck. And it primarily harms those folks without family wealth — it's a lot easier to stay on top of the bills despite adversity if you have generational assets to keep you afloat. This is most starkly reflected in the racial gap in credit scores, where Black and Latino consumers have lower credit scores as a group, which is a direct consequence of historical discrimination, current racism and the racial wealth gap.
Now, the credit industry would point out that credit scores are designed to predict who will repay a loan, and it's probably not a great idea to lend money to a struggling student loan borrower, an unemployed federal worker or a farmer who can't sell their crops, who have already failed to pay their bills. Fair enough, for now. But that federal worker may find a new job, and the market for those farmers' crops may recover. And those student loan borrowers were encouraged by society to borrow to get an education and better their lives; they were promised programs to help manage their loans that were subsequently blocked, that the Trump administration has failed to provide access to and that bills in Congress are seeking to diminish even further. Barely 1 in 3 student loan borrowers are making regular monthly payments. That's a sign of a systemic and societal problem, not individual irresponsible behavior by 7 million people.
Americans should not be shut out from future economic opportunities because of policy changes by the economic wrecking ball of the current administration. And their damaged credit records should not be used to decide whether they should get a job, be able to rent an apartment, and get insurance and utilities.
Inequality in the United States and globally is at record highs and contributes to societal unrest. Systems such as credit scoring entrench and exacerbate economic inequality and penalize lack of family and generational wealth instead of rewarding hard work and merit.
If we are to have any hope of a fairer, more stable society that provides opportunity to everyone, we need better systems that do not entrench inequality under a veneer of mathematical objectivity.