As people around the world strive to make sense of their new normal in the midst of the coronavirus pandemic, meeting your debt obligations may move to the back burner, especially if your earnings have diminished. Unfortunately, this situation will have a ripple effect, causing greater financial damage in the longer term, particularly to your credit scores.
While your first concern right now is (and should be) safeguarding your health, taking care of your finances must also be priority. Read on to get tips on protecting your credit in the wake of a job loss or income reduction.
Why a Proactive Strategy Is Important
If you’ve been laid off, or if losing your job in the near future is imminent as a result of the pandemic, your credit score won’t be hurt by whether or not you’re employed. However, whether or not you pay your bills will be a factor.
It’s important to remember that every business has been impacted by the pandemic, including creditors, lenders and service providers. Because everyone is working to figure out how to function during the economic free fall, many companies are willing to work with you in terms of payment plans, deferrals and repayment strategies. There’s one key requisite though: You need to be proactive.
Make a list of the accounts and service providers you currently pay and start contacting them. It’s important to reach out as quickly as possible so a missed payment doesn’t get reported to the credit bureaus. While unpaid debt may not knock down your credit scores right away, eventually you’ll take a hit.
Why does this matter right now? Damage to your credit scores will impact future interest rates for loans and credit cards, mortgage approvals and even whether service providers (think utilities and telecom) will grant you an account.
Contacting credit card companies, utility companies (water, gas and electric), student loan issuers and other entities with which you have monthly payments can make a big difference. Many companies will work with you during this difficult time — and even allow you to take a break on payments for a while.
For example, some credit card companies are permitting customers to skip payments without having to pay additional interest. Certain utility providers are giving extended grace periods so that service doesn’t get shut off. There are also internet providers that have issued a green light for temporary free service.
Contact each of these companies and ask for assistance. They aren’t going to automatically issue it without your request.
Hone in on Home
Missing a mortgage payment is a surefire way to ding your credit scores in a big way. However, several mortgage companies are suspending or reducing mortgage payments for up to 12 months for those who have lost their jobs.
As of March 2020, borrowers of mortgage loans obtained through Freddie Mac and Fannie Mae (which represent about 50% of home loans) may be eligible for a reduction or pause in their payments. Some banks, including Bank of America are also deferring mortgage payments on request by consumer. In some cases, missed payments will be added on at the end of the loan term.
Experts expect it’s just a matter of time before the entire mortgage industry will adopt deferral and reduction policies. However, as is the case with credit cards and loans, it’s up to you to contact the lender to settle on a new payment plan. Most lenders won’t report missed payments to the credit bureaus if they understand your personal situation and you have a plan in place.
Avoid Overextending Your Budget
When you’re in a precarious financial situation, it’s easy to rack up credit card debt. Avoid overspending and stick to a budget. If it’s not a necessity right now, don’t buy it.
The current financial situation will pass, and new opportunities lie ahead. Stay positive, be proactive and focus on the future. Take care of your finances now so your credit scores can remain solid.