The economic pain caused by the coronavirus pandemic keeps getting worse. Many people have lost jobs or had their hours cut, there’s no new stimulus bill in sight and their finances are suffering as a result.
Maybe you’ve become more reliant on credit cards to cover your living expenses, or even had to miss a few payments. While that’s understandable, it will have a negative impact on your credit score, which could be a problem once things get back to “normal” (whenever that may be).
“I can tell you that it’s temporary and dings happen, especially during challenging financial circumstances,” said Leslie Tayne, a debt resolution attorney and founder of Tayne Law Group. “The key is how to manage your credit and debt now, so the damage and impact are minimal.”
So if your credit score took a hit recently, or you want to protect your good credit during this challenging time, here are the best steps to take.
1. Talk to your lenders about your situation.
If you have a loan bill coming up and you don’t think you will be able to pay it in full, it’s a good idea to contact your bank or creditor as soon as possible to make them aware of your situation, according to Tom Quinn, vice president of FICO Scores.
“Your lender will likely have procedures in place to work with customers impacted by this unique health emergency,” he said. “In fact, several federal and state regulators have already issued guidance to lenders encouraging financial institutions to work constructively with affected consumers, small business owners and communities.”
For example, your lender may work with you to increase your available credit, set up a deferred payment plan or temporarily place the loan in forbearance. Quinn noted that the act of having your loan payments deferred or put in forbearance does not negatively impact your FICO score.
2. Double-check that payment plans are reported correctly.
You can still run into issues regarding how the lender reports your revised payment plan to the credit bureaus. A prime example is federal student loan borrowers who recently had their deferred loans incorrectly reported as past due, harming their credit.
“You may want to also check with your lender on how they intend to report these fields while the account is in forbearance or a deferred payment plan,” Quinn said. For example, does your lender intend to report the payment status of your account as “current” (i.e. paid as agreed) during the forbearance period? “Each lender is likely to have their own unique policies, so if you have loans from different financial institutions, you may want to contact each of them to cover all of your bases,” said Quinn.
Once you’ve confirmed how your lenders plan to report your loan status, check that the credit bureaus are correctly indicating that information on your reports. You can pull your credit reports from the three major credit bureaus (Experian, Equifax and TransUnion) by visiting AnnualCreditReport.com. This is the only website that’s federally authorized to provide all three reports for free once a year.
And keep in mind that even if you do work out a payment plan with your lender, any prior history of missed payments will still show up on your reports and negatively affect your credit for a while.
3. Review your credit reports for other errors.
While you’re in the process of reviewing your credit reports, it doesn’t hurt to check for any other issues on how your information is being reported by the credit bureaus.
“Not all creditors report to all three bureaus, so you’ll want to know what information is being reported and to which bureau, because scores can change drastically,” Tayne said.
Look for mistakes concerning your personal information (such as name or Social Security number), account status, balance, credit inquiries, etc.
“Erroneous information on your credit reports could be hurting your score at no fault of your own,” Tayne said. If you find any inaccurate information on your reports, contact your credit card company, loan servicer or lender and inquire about where that information is coming from. You can also file a dispute with each credit bureau through their website.
4. Don’t miss a payment (if you can help it).
If you have to skip a cell phone payment to put food on the table, it won’t be the end of the world. But do know that missing payments on bills is one of the fastest ways to kill your credit.
“The first and most important factor in your credit scores is your payment history,” said Christina Lucey, director of product and financial advocate at Credit Karma. In fact, payment history makes up about 35% of your score. “Even one missed payment can hurt your credit score, so do everything you can to not miss a payment entirely,” Lucy said.
And when it comes to credit cards, making only the minimum payment should be a last resort, as you’ll find yourself accruing costly interest.
5. Don’t close any credit cards (even if you’re not using them).
Lucey said that many people incorrectly assume they should close a card if it’s finally paid off or never used. While it may seem responsible to close credit cards you no longer use, that might actually damage your credit.
That’s because the amount of debt you owe in relation to the amount of available credit you have (also known as your credit utilization ratio) makes up another 30% of your score. The more credit you’re using up, the more it can harm your score. So if you have outstanding debt, closing a card wipes away some of your available credit while the amounts owed remain the same, driving up your utilization.
If you’re concerned about keeping a card with an expensive annual fee, Lucey said you can call your card issuer and ask them to downgrade it to one without fees while still maintaining your credit line and associated payment history.
6. Lower your credit utilization.
Speaking of credit utilization, any steps you can take to decrease your outstanding debt will go a long way toward improving your credit. “Decreasing your credit utilization can be one of the fastest ways to improve your credit score,” said Tony Wahl, director of operations for Credit Sesame.
The general rule of thumb is that you should aim for a utilization ratio of under 30%. That goes for individual cards as well as your total outstanding balances. “It’s even better if you can keep it under 10%,” Wahl said.
However, those percentages are guidelines and not hard and fast rules. Just try to keep your utilization as low as possible.
7. Pay off a small debt every month.
Taking steps like talking to your creditors and watching out for credit reporting mistakes are great offense. However, you can also add defense to your plan by paying off a small debt each month, according to Tiffany Aliche, a financial educator and founder of The Budgetnista.
“Your credit score is like the GPA you got in high school,” she said. “It’s an average of your grade.” So if you’re behind on a few bills and have missed payments, those are all Fs on your record that need to be offset with As, she explained. If your credit cards are paid off, one of the best ways to chip away at the unpaid bills is by putting the smallest one on a card each month (think Netflix) and then immediately paying it off.
“The amount doesn’t matter ― it’s the habit,” Aliche said. “Paying on time and in full is like getting an A+ every month.”
8. Take out a credit-builder loan, which doesn’t actually involve borrowing money.
Another way to add “As” to your credit report card is by taking out a credit-builder loan, which are offered by many credit unions. Not only will this add more positive payment history to your name, it will help diversify your credit mix.
Creditors like to see a variety of credit types in your history. If you have a credit card, which is considered revolving debt, that’s great. But you can boost your score by taking on an installment loan, which means you borrow one lump sum and pay it back in fixed payments until the debt is gone.
“What’s so great about a credit-builder loan is that you’re not actually borrowing the money,” Aliche said. Rather than giving you the funds, the credit union places that money into a savings account. You then pay back the “loan” in monthly installments over about 12 months. At the end of the term, you get all your money back. All the credit bureaus see is that you made 12 on-time payments and then paid off the account in full ― an A+.
9. Ask to be added as an authorized user.
Finally, if you want to build up a positive payment history but don’t want to take on any unnecessary debt right now, you can ask a friend or family member to add you as an authorized user on their credit card.
The best part about becoming an authorized user is that you don’t even need access to the card to reap the benefits. “If they have a great payment history and have had the card for several years, you could benefit from that credit history which will help improve your score,” Wahl said.
However, it goes both ways: If the primary cardholder misses payments, it could damage your score, too. And don’t expect authorized user status to send your credit score skyrocketing; it’s simply a way to give your credit a little boost along with all the other steps you’re taking to build good credit.