If you are worried about protecting your credit rating during the coronavirus pandemic, then you have come to the right place. It is not easy to maintain a good score when you are going through reduced hours or maybe even job loss.
But I have good news despite these uncertain times. There are resources and programs you can turn to for relief. So try to relax and read on to find out what you can do to maintain your credit score where it is now.
How Payment History Affects Your Credit Score
There are dozens of different credit scores out there, but they all factor in payment history to some extent. Since FICO scores are used the most often, let’s take a look at the payment history and other factors used by this score.
With FICO scores, five factors are taken into account:
- Payment history: 35%
- Amounts due: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
To have a good credit score, it is essential to have a low credit utilization rate. It is the amount of credit used versus the amount of credit available. For a good score, it must be less than 30%. But if you want a great score, you have to keep it below 10%.
Now you can see how important a credit history is to a good credit score. Paying your bills on time is crucial. Even a 30-day late payment can drop your credit score like a rock.
But these are not normal times, and you might face monthly expenses that your reduced income can no longer support. Fortunately, there is help to protect your credit score. But first, we’ll start by prioritizing your debt so you know which bills you need to pay first.
How to prioritize your debt
Many Americans are struggling to pay their bills due to the fallout from the COVID-19 crisis. So many Americans have lost their jobs, suffered pay cuts, or had their hours cut. And if you were already living paycheck to paycheck and didn’t have a large emergency fund, then times are especially tough for you.
There are two types of debt: secured and unsecured. If you can pay some of your bills but not all in a month, then the choice is straightforward. You start by paying the secured debts first.
What are secured debts?
These are debts related to tangible property, such as a house or a car. If you don’t pay your mortgage, for example, you could potentially lose your home due to foreclosure. Your car loan is similar. Your car could be repossessed if you don’t make your monthly payments.
And if you don’t make your payments on time, your credit score will drop dramatically as well. The higher your score, the greater the drop when you make late payments that are reported to offices.
Mortgage relief options. If you can cover your mortgage payments, do it. But what if you can’t? Call your lender today.
The Coronavirus Aid, Relief and Economic Security Act became law on March 27. The CARES Act provides relief for federally guaranteed mortgages. Your lender cannot foreclose on you for 60 days after March 18. And if you’ve had a financial crisis due to the coronavirus pandemic, you can apply for forbearance for up to 180 days.
If your mortgage is guaranteed by Freddie Mac or Fannie Mae, you also won’t have to pay late fees or temporarily report defaults to the credit bureaus.
But if your mortgage is not guaranteed 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 to contact your lender. If you miss a payment or default on your loan, it will be stay on your credit report for seven years. The impact on your credit score decreases over the years, but right now your goal is to keep your score as high as possible.
Most auto lenders have advertised payment deferral programs, but each lender has their own terms and conditions. The important thing is to call before you miss a payment. This is the best strategy to protect your credit right now.
And under the CARES Act, your lender cannot file a negative report on you with a credit bureau if you have set up a housing payment. But if you’ve missed a payment since Jan.31, you might have a harder time closing a deal. Don’t wait to call!
What are unsecured debt?
With unsecured debt, your lender does not hold any collateral to cover the debt. For example, credit card debt is unsecured debt because there is no tangible asset that your lender can take from you.
Other examples include unsecured personal loans, student loans, payday loans, and medical debts. The impact of missing any of these payments is similar. If you don’t pay as agreed, your late payment is reported to the agencies and your credit score goes down.
Payments by credit card. The CARES Act provides temporary credit score protection to those who are unable to make 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 will not report negative information to the credit bureaus at this time. This is a huge relief for those who 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 about your situation and that you want to find an accommodation to protect your credit.
In addition to the CARES Act, credit card issuers have voluntarily granted some financial relief, such as allowing you to skip a payment or by offering you a temporarily lower annual percentage rate. Call your transmitter and find out what your best options are.
Student loan payments. The CARES Act also provides relief for student loans. The Office of Federal Student Aid has taken action to forbear student loan borrowers, which means you can stop making monthly payments until September 30. Make the payments if you can, but if you can’t, take the opportunity.
Check with your loan officer to find out what other relief options may be available. You can also find information on 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 is also some protection under the CARES Act if you have a home in place with your lender. Again, you need to call and set up a payment plan.
How long will the CARES law provide credit protection?
The CARES Act will likely stay in effect until the summer and possibly longer. For now, just focus on making payments on the secured debt that you can. What remains can be used for the bulk and for payments on unsecured debts.
Yes, there is still a chance that your credit score will suffer before this crisis is over. Having a good score is important, but right now it’s more important to focus to stay afloat. Once your personal economy is restored and you start paying off your debt, your credit score will start to rebound.