Managing Your Credit During Coronavirus

This post can be found en Español here.

This content is for the first stimulus relief package, The Coronavirus Aid, Relief and Economic Security Act (The CARES Act), which was signed into law in March 2020. Looking for the latest news on the stimulus relief package? For more information on The American Rescue Plan, the stimulus relief package which was signed into law in March 2021, please visit the “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.

In response to the Coronavirus (COVID-19), the government – and many banks and credit unions – have temporarily adjusted their lending policies. These changes can impact your credit.

Given the uncertainty of the economic environment, you may be thinking about shoring up your credit. Or if your income has already taken a hit, you may find yourself using your credit card more or looking for a loan to bridge the gap. There are ways to manage your credit – and maybe even get ahead financially – during these tough times.

This article will walk you through:

• What good credit looks like
• How to maintain your credit during COVID-19
• How student loan and mortgage forbearance can impact your credit
• What to watch out for if you modify your loans
• How you could actually get ahead right now, financially

Now let’s break this down.

What does good credit look like?

There are 5 major factors that impact your credit score, in order of importance:

1. Payment history
2. Amounts owed
3. Length of credit history
4. Types of credit
5. New credit accounts

While times are changing, so far these things haven’t.

In a nutshell, the keys to good credit are paying your bills on time, paying down debt and spending carefully where possible, keeping old credit accounts open and not opening too many new credit accounts at once. 

How to maintain your credit during COVID-19

In addition to the general credit guidelines above, here are a few more specific ways to maintain your credit score in the time of Coronavirus, based on two different situations.

1 – If money is tight

If money is a problem right now, take advantage of the financial resources and alternative payment options lenders and other organizations are currently providing to help people through this crisis, such as:

• Student loan, rent and mortgage forbearance
• Expanded unemployment benefits
• Alternative utility payment plans
• Increased credit limits

That way you don’t miss payments, make late payments, run up your credit usage, or negatively impact other factors that make up your credit score.

2 – If your income is stable

If your income is steady, consider using this time to get ahead by paying down your debt, saving for the future, or meeting other financial goals.

We’ll get into specifics about how to do this in a bit, but for now, try to:

• Pay off your credit card balances completely each month. This keeps you from getting charged interest. Bonus if you earn credit card rewards while you’re at it.
• Keep your max credit usage low. Your credit usage is how much of your total credit limits (both from card-to-card and across all cards) you use. Many experts recommend you keep this below 30%. If you want to reach an “expert” level with your credit, try keeping it under 10%. That would mean only using $1,000 of a $10,000 credit limit, for example.
• Make all your payments on time. As the largest factor that impacts your credit score, according to FICO®, missing payments or paying late could negatively impact your credit score for years to come. This carries a lot of weight in credit-scoring models because lenders want to know that you can keep your financial commitments and will pay them back on time and in full. As a result, paying on time can help you build credit.
• Start or grow your emergency savings fund. That way, if you do wind up in an emergency situation, you won’t necessarily have to rack up credit card debt or borrow more money to cover that unexpected expense. Increasing the amounts you owe can reduce your credit score temporarily.

Worst case scenario? If you’ve exhausted other options and need to lean on credit right now (and your credit score is suffering as a result), there are many tools to help you recover financially and rebuild your credit later if you need to. Damaged credit doesn’t have to be a permanent situation, though perseverance is required as it may take months – or in some cases, years – to recover.

Will loan modifications impact your credit?

Whether you need or want to forbear on your student loans or mortgage right now, the Coronavirus Aid, Relief and Economic Security (CARES) Act has put extra protections in place for borrowers on federal loans.

For federal student loans:

• You can stop paying through September 30, 2020 (effective March 2020)
• You will not be charged interest
• All payments you do make will go toward your principal

For more on managing student loans during COVID-19, read this.

For federally-backed mortgages:

• Your lender cannot foreclose on you for 60 days after March 18, 2020
• You have a right to request forbearance for up to 180 days, plus one extension of an additional 180 days

Many private lenders are also working with borrowers to modify loans.

According to the Credit Union National Association, 92% of credit unions surveyed are offering loan modifications to help consumers be more financially resilient during the pandemic. These modifications include:

• Loan extensions
• Line of credit increases
• Interest-only loan repayment
• Reduced or no interest

Many other commercial banks have created coronavirus information centers that you may find helpful. Talk to your specific lender about your options.

So what does this mean for your credit?

According to the Consumer Financial Protection Bureau, if your mortgage is backed by Fannie Mae or Freddie Mac and you are granted forbearance to delay making monthly payments:

• You won’t be charged late fees
• No delinquencies will be reported to the credit bureaus
• Foreclosure and other legal proceedings will be suspended

So your credit won’t be hurt by opting-in to forbearance.

According to credit bureau Experian:

“Deferring your loan payments doesn’t have a direct impact on your credit scores —

 and it could be a good option if you’re having trouble making payments.”

What to watch out for if you modify your loans

If you take advantage of forbearance or alternative payment options, realize that once it’s over, lenders may require either a lump-sum payment, an increase in monthly payments, or a plan to pay back accrued principal and interest.

Another option is to just move the year of forbearance (or however long the loan payments are delayed) to the end of the mortgage or loan.

Either way, make sure you understand how forbearance can alter the loan so you can build it into your financial plan. Otherwise, you could end up with a bill you can’t afford to pay that could cause damage to your credit (if you are late paying it, or can’t pay it at all).

Have a preferred repayment option? Try to negotiate that with your lender, and make sure you get everything in writing.

How to get ahead financially (and credit-wise) during COVID-19

In this time of record-high unemployment and uncertain health outcomes, it’s never too early to have a plan in place to protect and improve your credit. 

Here are some ideas to help you get started.

1 – Put your student loan payments to work

Since federal student loan payments can be put on hold for a while, you have some choices for how best to use that money.

You can:

Continue to make your student loan payments and pay them down faster (since everything goes to principal, not interest). If you can, consider paying extra while the 0% interest lasts to make even more progress. This can help your credit score as it reduces the “amounts owed” factor mentioned previously.

Or:

Take the money you would normally put toward those federal student loan payments and use it to pay down higher-interest debt, such as credit card debt. 

By paying extra each month, you could pay down your credit card balance faster, save money on interest, and reduce the amounts you owe, which again could help boost your credit score.

At the very least, try to pay more than the minimum balance due each month.

2 – Be smart about how you use your COVID-19 relief money

If you have a check headed your way and don’t need the money for immediate necessities, consider putting it toward building your credit. Whether that means paying down existing loans or credit cards or opening a secured card or credit-builder loan.

Think of your credit score as an insurance policy for your finances – build or improve it now in case you need to borrow money in the future. That way, you could qualify for lower interest rates and better terms if and when you need them. 

3 – Hope for the best, plan for the worst

Since staying healthy is top of mind right now, make sure you have enough money set aside to pay your healthcare deductible, should the need arise.

Medical bills won’t necessarily hurt your credit. But if medical costs cause you to get behind on other bills, have debts sent to collections or even declare bankruptcy, that could hurt your credit.

You probably don’t want to have to worry about finances in the midst of a medical issue either.

Being financially prepared will help reduce the stress that is likely to come from a medical situation.

4 – Use money from optional expenses on hold due to COVID-19

Let’s say, for example, you used to regularly buy tickets to concerts, sporting events, or other types of entertainment that are now canceled because of the coronavirus. Since you’re no longer spending money on those items, use it to pay down debt (improving the amounts owed factor) or reallocate those funds toward other financial goals.

If you had been planning to buy a house or car, you could save for a future down payment faster, build emergency savings, or set the money aside to help loved ones whose income is hurt by coronavirus.

If live shows don’t apply to you, think of other things you spend money on that are no longer an option right now (like travel) and reallocate that money.

And finally:

5 – Make a spending plan and track expenses

Make a budget or spending plan, using a tool such as Mint, so you can track expenses and make sure your money is going toward the things you truly value.

You’d be surprised how much money you can find itemizing your expenses that could instead go toward building financial resilience with things like savings, retirement, paying down credit card debt, getting ahead on your mortgage or otherwise building your credit.

Bottom line

Making smart moves with your money is a good idea during the best of times – and absolutely essential when times are tough. While the main focus in the media now is on physical health, remember your financial health is critical and plays a role in your overall physical and mental wellbeing.

Don’t forget to take care of yourself and your credit right now.

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