Credit maintenance: how Covid-19 can affect your credit score
America and the world at large are facing an unprecedented health and financial crisis. Find out how it can affect your credit score – and what to do.
The coronavirus pandemic has had dire effects on the economy with experts now saying it will take several years for things to resume to normal. As a result, millions of Americans have already been rendered jobless and many more are on the verge as the effects of the crisis continue to sting.
With the prevailing conditions, you may be wondering how your credit score could be affected. If you’re like most people, your income has declined significantly, yet you still have bills to pay.
And to a significant degree, how you handle your finances during this pandemic will determine whether you come out of it with a scathed or an unscathed credit score.
Does your employment status affect your credit score?
If you are one of the millions of Americans who have filed for unemployment since March, you’re probably asking yourself how your new status might affect your credit score. Well, you’ll be glad to know that it doesn’t have any direct effect on your credit. In fact, credit reporting agencies may be unaware of this unless you choose to inform them.
Nonetheless, one thing is for sure; your loss of income will ultimately impact your ability to service your debts which will then pose a risk to your credit.
Here, we take a look at three key instances where your credit score might take a hit during this pandemic and what you can do about it.
Defaulting on payments without prior agreement with your creditors
Payment history and accounts owed contribute 35% and 30% to your FICO score respectively. Unless you have a prior arrangement with your creditor, any defaults, charge offs and collections will be added to your record. Such negative information could stick around for years, thereby hindering your ability to qualify for loans and credit.
If you find yourself in a position where you’re not able to pay your debt balance in full, try to pay the minimum balance instead. According to Crediful, you’re better of making minimum payments instead of no payments at all. Sure, this might lead to you having a revolving balance for a few months, but it’s a lot better than having defaults and increased interest rates on your record.
Additionally, many creditors are now offering personalized payment plans for people who can’t honor their credit card debt due to the coronavirus pandemic.
If you still can’t afford to pay the minimum balance, reach out to a representative and try to chart a way forward with them. With an agreement in place, any defaults or late payments will not reflect in your score.
Increasing your existing credit card limits
We get it; cash is tight right now and you’re likely looking at all possible avenues to look for more money to settle the swelling expenses. At this point, you might consider extending your credit card limits to increase your spending capacity.
However, doing this will most definitely hurt your credit utilization ratio which is the proportion of your debts to permissible limits. Ideally, it’s best to keep this at below 30 percent as a higher ratio can have a quite adverse effect on your credit score.
On the other hand, if you raise your limit but don’t use it up, your credit utilization rate goes down. Whenever possible, try to increase your credit limit and avoid spending all of it. This is an excellent way to maintain or even grow your credit score during these challenging times.
Making multiple applications for new credit
Any time you apply for new credit, lenders will do a credit search to check your creditworthiness and capacity to pay back the debt. Applying for a single card shouldn’t affect your score, but when you do it multiple times, it definitely will.
This is referred to as a hard credit check. A single check may lower your score by a few points, but it should bounce back and ultimately, the inquiry will permanently drop off your record. Multiple hard inquiries within a short period, however, imply to lenders that you are a high-risk customer.
Usually, if your request for new credit is denied, the hard inquiry will stay on the records for two years. This is why financial experts recommended that you limit and spread out your applications.
Even better, use a pre-eligibility test before applying for new credit to find out the likelihood of qualifying for a loan without impacting your score.
Photo by Avery Evans