Natural Disasters Have Lasting Impact on Credit Scores

Blog posted On April 24, 2019

As natural disasters like hurricanes and wildfires grow more prevalent each year, researchers have compiled the data to show their lasting financial impact.  The Urban Institute identified zip codes where households received financial assistance from the Federal Emergency Management Agency’s Individuals and Households Program to determine the long-term effects natural disasters have on residents’ credit scores and finances. 

In the report, the Urban Institute researchers wrote, “the combination of devastating natural disasters with financially fragile families can be a recipe for not only short-term financial hardship, but also long-term declines in financial health.”  In addition to the short-term costs of rebuilding and replacing damaged homes and furniture, afflicted residents may face longer-term issues like loss of income.  Damage to their workplace may cause them to miss work, or other infrastructure damages making it difficult or impossible to even get to work. 

Natural disasters not only have an immediate effect on residents’ income and savings, but a lasting effect as they rebuild.  Following Superstorm Sandy, residents throughout the Northeast saw a 7-point drop on average credit scores.  Two years later, average credit scores had dropped 10 points.  The number of people with debt in collections also increased.  One year after the disaster, the share was up by 5%, three years after this share jumped by 10%.  The situation is exacerbated in already financially precarious communities.  Residents may use payday loans or other high-interest solutions to cover costs, worsening the financial impact over time. 

Researchers also found that medium-sized disasters had far worse financial consequences than larger-scale disasters.  From the study, researchers found, “residents hit by medium-sized disasters may experience greater financial struggles because these disasters do not receive the influx of federal support that large disasters receive.” 

To protect yourself from natural disasters, it’s important to prepare ahead of time.  Be familiar with your homeowner’s insurance and what it does and does not cover.  Save for an emergency fund and be prepared to cover some costs while waiting for federal assistance, as it is often delayed.  With severe weather instances expected to continue, it’s important to be prepared. 

Sources: MarketWatch