How to Protect Your Credit Score During the Pandemic

Credit Guide Credit Guide Series

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Many people are experiencing unprecedented financial hardship as a direct result of the COVID-19 pandemic. There’s no question these are uncertain and scary times for everyone. 

Government agencies, financial institutions, and nonprofit credit counseling services are offering some relief options — but in most cases, you have to be proactive in order to take advantage. If you’re experiencing lost income or other financial burdens due to the crisis, here are some ways to protect your credit score. 

How to Protect Your Credit Score

File for unemployment

The CARES Act has significantly expanded availability and eligibility of unemployment benefits, including making benefits available to freelancers and gig workers and paying out an additional $600 per week to anyone who qualifies. (The extra benefit is due to expire at the end of July. If you didn’t qualify for unemployment benefits before the pandemic, you may now be able to apply.)

Take advantage of relief programs

Most lenders are offering deferment or forbearance on everything from credit card debt to mortgage loans. There’s one caveat: You won’t automatically be signed up for these programs. You have to ask. If you’re suffering from financial hardship as a result of the pandemic, contact your lenders as soon as possible to ask about their relief assistance programs.

Seek credit counseling

“Connecting with a credit counselor is something someone should do immediately, as soon as they even have an indication they’ll be losing their job or they’ll be experiencing a reduction of income,” says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. The National Foundation for Credit Counseling can connect you with a credit counselor for free if you visit NFCC.org

Cut discretionary spending

Budgeting has always been an important part of good financial health, but COVID-19 has entirely reshaped the way most of us think about which purchases are necessary for survival. “We often talk about needs vs. wants,” says Rod Griffin, senior director of consumer education and advocacy at Experian. “A lot of us are now looking at needs as genuinely life-sustaining things. Before, a want was something you wanted and a need was something you really, really wanted. Now, it’s food, clothing, and shelter first and foremost.”

Make minimum payments on your credit cards

If you can continue making debt payments during the pandemic without asking for deferment or forbearance, do it. Even if you just pay the minimum balance, you’ll avoid racking up further debt, which could lead to more financial hardship.  While relief programs are incredibly useful to those who need assistance, you shouldn’t freeze your accounts unless it’s absolutely necessary. “You’re sort of kicking the can down the road a little bit,” says McClary. “It’s probably not a great idea to plug into a payment deferment program you really don’t need in the moment.”

If you have a savings or emergency fund, use it

Many people have emergency savings accounts with several months’ worth of living expenses set aside for a rainy day. Now is the time to start using those funds if needed. At the very least, these funds can help you get by until unemployment checks arrive or more permanent relief programs become available.

Communicate with creditors

Creditors are very aware of the widespread financial hardship brought on by COVID-19, and some of the relief programs they’ve made available as a result are unprecedented. Stay in contact with your creditors and be honest about your financial situation. You might be surprised by the help you receive.

Pro Tip

If you are struggling financially, you should open the lines of communication to your lenders and look into relief programs under the CARES Act.

What Lowers Your Credit Score? 

During these difficult financial times, it’s important to know what hurts your credit score so you can avoid taking actions damaging your long-term financial health. The last thing you want is damaged credit on top of the hardships caused by COVID-19.

Late payment history

Making at least the minimum payments on time is imperative to maintaining good credit. But if you’re in danger of being late, call your lender. Deferment and forbearance programs could help give you relief without incurring a derogatory mark on your credit report.

Accounts in collections

Severely delinquent accounts will eventually be sent to collections. But even if you entered the crisis with a late payment, current relief programs are designed to effectively freeze your account where it was until the situation improves. For example, if you were 30 days late at the beginning of the crisis, you’ll stay 30 days late without accruing additional delinquency until the relief programs are lifted. But again, you have to be proactive in asking for relief.

Loan default

If you default on a loan during the COVID-19 financial crisis, currently, there aren’t any protections in place to keep this off your credit report. It’s imperative to contact your lenders as soon as you start experiencing financial difficulty.

Bankruptcy

Despite COVID-19 shutdowns, many courts are still handling bankruptcy filings remotely. Like loan defaults, any bankruptcy incurred now will appear on your credit report for seven to 10 years just as always. In an ideal situation, you should contact your creditors to defer payments before bankruptcy becomes necessary.

Foreclosure

A foreclosure can significantly lower your credit score and can stay on your report for seven years. If you’re struggling to pay your mortgage, first reach out to your lender and explain your situation. If you have a pandemic-influenced hardship, you can request forbearance (temporary pause or lowered payment) for up to 180 days under the CARES Act. This option will be available until the COVID-19 national emergency is declared terminated or as late as December 31, 2020. 

High credit utilization

Running your credit card bills up to cover expenses due to financial hardship during the COVID-19 crisis will increase your credit utilization and hit your credit score. But what most consumers don’t know is their credit utilization rate could go up during the crisis even if they don’t increase their balances. “People who may not have been borrowing a lot have seen their credit card issuers actually lower their credit limit as a way to limit risk,” says McClary. “Bringing those credit limits closer to the balance already owed can have a negative impact on somebody’s credit score.”

Too many credit applications

In addition to the usual implications of too many credit inquiries on your report, the financial crisis has caused lenders to reduce the types of credit accounts available. You may want to hold off on applying for new lines of credit until banks begin to recover.

In Conclusion 

If you’re struggling financially as a result of coronavirus, it’s important to know your rights. You may be entitled to relief programs from your lenders based on the provisions in the CARES Act. “This includes things like forbearance, payment waivers, and deferments,” says John Ulzheimer, formerly of FICO and Equifax. If you’re in good standing and you live up to your end of the accommodation, the lender has to report you as being current to the credit bureaus. This act will help to protect your scores from the potential negative impact of derogatory credit reporting.

“But,” Ulzheimer cautions, “you have to request an accommodation. It’s not automatic.” 

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