IF YOU’RE WORRIED ABOUT protecting your credit score during the Coronavirus pandemic, then continue reading. It isn’t easy to maintain a good score while you’re experiencing a reduction in hours or maybe even a job loss.
But there is some good news in spite of these uncertain times. There are resources and programs for you to turn to for relief. So try to relax and read on to find out what you can do to keep your credit score where it is right now.
How Payment History Impacts Your Credit Score
There are dozens of different credit scores, but they all consider payment history to some degree. Since FICO scores are most often used, let’s take a look at payment history and other factors used by that score.
With FICO scores, there are five factors considered:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
To have a good credit score, it’s essential to have a low credit utilization ratio. This is the amount of credit used compared with the amount of credit available. For a good score, it needs to be less than 30%. But if you want an excellent score, you should keep it below 10%.
Now, you can see how important credit history is for a good credit score. Paying your bills on time is crucial. Even a 30-day late payment can make your credit score drop like a rock.
But these aren’t normal times, and you might be facing monthly expenses that your reduced income can no longer support. Fortunately, there’s help to protect your credit score. But first, we’ll begin by prioritizing your debt so you know which bills you should pay first.
How to Prioritize Your Debt
Many Americans are struggling to pay bills due to the fallout from the COVID-19 crisis. So many Americans have lost jobs, taken pay cuts or had hours reduced. And if you were already living paycheck to paycheck and you don’t have a sizable emergency fund, then times are especially tough for you.
There are two different types of debt: secured and unsecured. If you can pay some of your bills but not all of them in one month, then the choice is simple. You start by paying secured debts first.
What Are Secured Debts?
These are debts tied to a tangible asset, such as a house or a car. If you don’t pay your mortgage, for instance, you could eventually lose your home due to a foreclosure. Your car loan is similar. Your car might be repossessed if you don’t make your monthly installment payments.
And if you don’t make your payments on time, it also will drop your credit score by quite a bit. The higher your score, the bigger the drop when you make late payments that get reported to the bureaus.
Mortgage relief options. If you can cover your mortgage payment, do so. But if you can’t? Call your lender today.
The Coronavirus Aid, Relief and Economic Security Act became law on March 27. The CARES Act offers relief for federally backed mortgages. Your lender cannot foreclose on you for 60 days after March 18. And if you’ve had a money crisis due to the coronavirus pandemic, you can request a forbearance for up to 180 days.
If your mortgage is backed by Freddie Mac or Fannie Mae, you also won’t incur late fees or have delinquencies reported to the credit bureaus temporarily.
But if your mortgage isn’t backed by the government, your best bet is to call your lender and ask for help. The Consumer Financial Protection Bureau has a guide to coronavirus mortgage relief to help you find the right options.
Auto loan payments. The first thing to do is contact your lender. If you miss a payment or default on your loan, it will stay on your credit report for seven years. The impact on your credit score decreases as the years go by, but right now, your goal is to keep your score as high as you can.
Most auto lenders have announced payment deferral programs, but each lender has its own terms and conditions. The important thing is to call before you miss a payment. That’s the best strategy to protect your credit right now.
And under the CARES Act, your lender can’t file a negative report on you to a credit bureau if you have a payment accommodation in place. But if you’ve missed a payment since Jan. 31, you may have a harder time working out an agreement. Don’t wait to call!
What Are Unsecured Debts?
With an unsecured debt, your lender doesn’t hold any collateral to cover the debt. For instance, credit card debt is an unsecured debt because there isn’t a tangible asset that your lender can take from you.
Other examples include unsecured personal loans, student loans, payday loans and medical debt. The impact of missing any of these payments is similar. If you don’t pay as agreed, your tardiness gets reported to the bureaus and your credit score drops.
Credit card payments. The CARES Act offers temporary credit score protection to those who are unable to make their minimum monthly payments. If your account is currently in good standing, you can ask your lender for a payment accommodation.
Once you have a written agreement in place, your lender won’t report negative information to the credit bureaus right now. This is a huge relief for those who have paid their bills on time and believe their financial health will return.
But the CARES Act won’t help you protect your credit score if you’ve already missed payments or defaulted. So act now and contact your issuers. Let them know your situation and that you want to work out an accommodation to protect your credit.
Aside from the CARES Act, credit card issuers have been voluntarily providing some financial relief, such as allowing you to skip a payment or offering you a temporarily lower annual percentage rate. Call your issuer and find out what your best options are.
Student loan payments. The CARES Act also offers relief for student loans. The Office of Federal Student Aid has taken the step to place student loan borrowers in forbearance, which means you can stop making monthly payments through Sept. 30. Make the payments if you can, but if you can’t, take advantage of this opportunity.
Check with your loan servicer to find out what other relief options might be available. You can also find information about student loans and the coronavirus pandemic at Federal Student Aid.
Unsecured personal loans. Personal loans are installment loans. As with credit cards, credit relief options differ among lenders. There’s also some protection under the CARES Act if you have an accommodation in place with your lender. Again, you need to call and work out a payment plan.
How Long Will the CARES Act Offer Credit Protection?
The CARES Act legislation likely will remain in effect well into the summer and perhaps longer. Right now, just focus on making the payments that you can on secured debt. What’s left over can go toward essentials and payments on unsecured debt.
Yes, there’s still a chance your credit score might suffer before this crisis is over. Having a great score is important, but right now, it’s more important to focus on staying afloat. Once your personal economy is restored and you start paying down debt, your credit score will begin bouncing back.