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Safeguarding your credit score from coronavirus

How to prevent missed bills, payment deferrals and financial hardship agreements from impacting your score.

If you’re worried about how the current COVID-19 pandemic will affect your credit score, you’re not alone. Thankfully, many lenders and policy oversight organizations are working to help consumers. While waivers and deferments are available for many consumers, there are still steps you should take to avoid blemishes on your credit score.

Tips to keep your credit score safe during coronavirus

During this time of uncertainty, there are some ways to protect your credit score. Here is what you can start doing now:

  1. Reach out if you can’t pay. Many lenders and credit card companies are offering coronavirus financial assistance programs. Contact them before your due date to avoid late payments or fees.
  2. Document payment arrangements. You want proof of the arrangement you make with your lender. This can help resolve any potential issues down the road.
  3. Regularly check your credit report. Hold you lenders accountable for following your agreements and the provisions set out by the CARES Act.
  4. Dispute inaccuracies. If anything on your credit report appears inconsistent or wrong, file a dispute.
  5. Leave a note on your credit report. If your credit score does drop, go to the credit bureau websites to add a note on your reports indicating it was caused by coronavirus hardships. This provides additional context for lenders in the future.

New congressional act helps protect your score

Congress recently passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), a bill offering a number of protective measures aimed at helping businesses and Americans stay healthy and financially stable during the coronavirus pandemic. Among the measures is Section 4021, which requires lenders report an account as current if a payment is made by the consumer while under a financial arrangement with the lender. This applies for arrangements made from January 31, 2020 through 120 days after the date of enactment or 120 days after the end of the national emergency order.

This means that deferments, hardship programs and other similar arrangements with your lender should not reflect negatively on your credit score so long as you make your payments. However, if your account was in delinquency prior to your request for an arrangement, your lender can still report your account as delinquent until you restore your account to current.

Your lenders want to help. Let them!

If you’re concerned for your financial health in these coming months, don’t try to go it alone. Missing a payment doesn’t have to hurt your credit score — the CARES Act and lender support are there to prevent that from happening. But to get that help, you’ll need to call your lender.

What happens if I miss a payment on my credit card, mortgage or loan?

Most providers don’t report late payments to credit bureaus until 30 days past the due date. These late payments can stay on your credit report for seven years.

Luckily, most banks have created loan payment relief packages during the COVID-19 pandemic. Reach out to your bank and credit card providers to see what programs are available for you and whether you can reduce or postpone payments during the crisis.

What happens if I default on a payment?

It depends on the kind of debt. Unsecured debt like credit cards and personal loans usually come with fees and an increase of your interest rates.

Secured loans generally have a higher price. If you have a secured loan, that means the bank or credit card holds collateral — say a deposit for your credit card, your car for a loan or your house for a mortgage. When you miss a payment on one of these loans, the bank can claim the collateral as payment for debt. Some other debts can also garnish your wages to repay. Here are a list of loans with the consequences for missing payments.

Loan typeDays until your account considered in defaultConsequence
Student loan270 daysWage garnishment
Credit card180 daysLikely a lawsuit and wage garnishment
Mortgage30 daysForeclosure
Car loanUp to 30 daysRepossession
Secured loan150 daysCollateral seizure
Unsecured loanFrom 120 to 180 daysLawsuit and wage garnishment

How can I avoid going into default?

If you’re struggling to make your repayments, speak to your bank, utility company or Internet provider and ask whether they offer any hardship or forbearance utility plans. Ask how the creditor reports your repayment history if you enter into a hardship, and request that it’s not listed as default or overdue for payment.

If your creditor rejects your request for an arrangement and you can’t pay off your bills, call the credit bureaus. TransUnion and Equifax recommend that you add a brief 100-word explanation to your credit reports about your situation. This can be anything like, “My negative accounts are due to the coronavirus situation. I intend to fix this as soon as I can.”

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What happens to my credit score if I defer my home loan payments?

Deferring your mortgage frees up cash for other more pressing expenses. The important thing is to contact your lender before you miss any repayments so you can organize a deferral. If your lender agrees to place your account in forbearance or deferral, it’s not likely to affect your credit score. However, the best advice is to speak to your lender and ask what is reported to the credit bureaus and make the appropriate arrangement for your situation.

While each lender has a slightly different policy, you’ll likely still accrue interest. Once you start making repayments again, it’s likely your monthly payments to account for the added interest. Some lenders may allow you to extend your loan term instead, making smaller repayments over an additional period.

What if I decide to access my retirement savings?

The CARES Act allows you to tap your retirement savings up to $100,000 without paying a penalty. This should be done as a last resort, but accessing cash from your retirement doesn’t affect your credit score.

What if I request a credit limit increase on my credit card?

Requesting a credit limit increase has the potential to affect your score. When you apply, your credit provider might do a hard pull on your credit, which drops your credit score by a few points. And having too many hard pulls over a short period of time can add up and decrease your score.

However, if you do get a credit limit increase, and if the new line of credit lowers your utilization rate, this will likely have a positive impact on your credit score.

Is there anything that can help me manage my repayments?

If you’re struggling to make repayments on multiple credit cards or loans, consider debt consolidation options. Debt consolidation means taking out another loan or credit card and combining your existing accounts into one. Ultimately this can reduce your fees and interest.

But before you apply, make sure you can qualify for a new loan or credit card, and that you can afford the repayments.

There are many resources out there to help you navigate your financial situation during the coronavirus crisis.

How can I see where I stand now?

To safeguard your credit score during these difficult times, find out how you’re doing now. The three major credit bureaus let you check your credit score for free once every 12 months. But most credit cards let you access your credit score for free whenever you want.

Read more about how to navigate the COVID-19 outbreak.

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