The COVID-19 crisis has been interrupting the global supply chains, business activities, stock markets, and other economic factors. Credit holders are no exception. All of us are justifiably worried about the current economic downturn, and whether it will cause a potential drop in our credit.
Let’s get one thing straight right away, though. One’s credit score won’t immediately go down just because the market conditions plummeted, unlike the value of RRSPs or stocks. When it comes to our debts and credit, it entirely depends on our individual actions.
There are, however, indirect ways the COVID-19 situation may affect your credit score. In this article, we’ve run down factors that may seemingly be correlated to the health of your credit score, as well as ways on how to manage them in the meantime.
Discontinued Credit Payments
Since people can’t work or do business as they normally would, there’s a significant decrease in their earnings. When you significantly have less or no money coming in, you’re more likely going to be double-minded to send it out.
This can potentially limit your ability to make repayments to your credit card bills, mortgages, and other loans. The risk is, failing to pay off your debts will impact your payment history, which will negatively influence your credit score in turn.
If you’re currently having a hard time keeping up with your credit payments, here are some tips you can use to stay ahead and mitigate its effect on your credit score:
- Keep track of your credit. Regularly check your credit score first. All three main credit bureaus are now providing free weekly online credit reports.
- Cut down your expense to the bare minimum. Always stick to your budget and keep in mind that every expense matters.
- Pay what you can on time. It’s the least you can do to prevent late payment penalties, higher interest rates, and even credit report dings.
- Talk to your lenders. While credit lenders have no obligation to help you, they offer assistance sometimes. Ask whether you can work out a temporary payment arrangement, defer your payments, or append a 100-word consumer statement.
Nowadays, financial institutions are lowering interest rates in response to the COVID-19 crisis, but only temporarily. Let’s say your lender allowed you to make deferred payments. When the deferral period ends, you’ll still accrue interest and may experience an increase in your monthly payments, probably when the pandemic ends. However, the good news is at least your credit score isn’t going to be impacted and will remain intact.
More Credit Usage
If you have remaining credit on your credit card and you’re in a dire financial situation, you may want to use up your credit and charge everything you can. That’s understandable (and relatable), considering the ongoing crisis that we are in now.
Let us remind you that relying heavily on your remaining credit will rack up your credit utilization ratio and interest charges, which will eventually hurt your credit score. Don’t forget that any credit is a debt that will continue to grow. You may want to avoid it if you can.
Instead of falling back on credit cards, try tapping in your savings now. Use your emergency funds or even some of your gleanings for your vacation trips or a new gadget. Postpone your goals for the meantime.
Obtaining More Credit
It’s practical to take out financings to make ends meet, especially now that we’re currently cash-strapped or, even worse, laid off and unemployed. Fortunately, many lenders can understand the financial concerns people are facing right now and are now offering some modified loans to those who need extra funds.
Multiple credit inquiries affect your credit score and loan eligibility. Lenders tend to pull your credit report to see and assess your creditworthiness. Seeing multiple inquiries on your report (i.e., you’ve been applying for several loans) can show how financially stressed you are. Lenders might think you’re a risky borrower and likely turn you down.
Another reason why lenders might say no to you is that you’ve maxed out your existing credit. It’s a sign of financial trouble for creditors. They usually interpret this as a scenario where you heavily rely on your credit and/or may not be able to keep up payments with any new credit.
Consider utilizing balance transfer opportunities rather than using more or taking out new credit. It frees up an existing credit card, but just be cautious of balance transfer pitfalls. Alternatively, you can always tap into your savings and investments. Doing so can safely maintain your credit score.
Due to the economic crisis, many financial institutions are withdrawing some of their credit or loan products from the market. If you need financing, now is the best time to do it. However, make sure you understand not only the perks but also the consequences of your actions. Once more, your credit score is shaped by you, not by the current pandemic.