Coronavirus Credit Score Tips
Points of Interest
By taking steps to avoid creating more debt and working to strengthen your credit score, you can emerge from the coronavirus pandemic in better financial shape than you were when it started.
The novel coronavirus has impacted our lives in many ways, including our finances. With unemployment reaching 14.7% this past April and remaining above 10% as of July, it’s clear that many are suffering from economic hardships due to the pandemic.
The economic impacts to your finances can potentially outlast the pandemic if you aren’t careful. If you miss a payment now due to job loss or other hardships, it can cause damage to your credit that could take years to recover from — even after you head back to work. It’s important to do everything you can to avoid increasing your debt during these challenging times, while also maintaining or strengthening your credit score.
How to prevent falling into more debt
Given the sheer amount of people who are unemployed or underemployed right now due to the coronavirus pandemic, it’s safe to assume that many, many people are finding themselves further in debt from the financial hardships. Current data from the U.S. Bureau of Labor Statistics shows a massive number of people have now been unemployed for 15 weeks or longer, which makes it tough to pay bills on time.
Furthermore, data shows that 8.4 million people are involuntary part-time workers, which could lead to additional debt issues for those who are struggling to make the minimum payments due to receiving smaller paychecks than normal.
The economic impact of this health crisis isn’t over, either — so it’s important to avoid adding debt during this time. If you fall into a cycle of running up your credit cards or taking out loans, you could end up in a bad financial spot over the long haul.
To avoid stacking on more debt during this pandemic, you should focus on:
Budgeting – A budget is the first step to getting spending and debt under control. Those who already have a budget should look for ways to minimize spending and focus on savings. Those who haven’t yet developed a budget should use the current economic downturn as a good reason to do so.
Negotiating – If you lost your job or part of your salary due to coronavirus, you may want to start negotiating with your creditors to come up with a payment plan that fits your new financial parameters. Even if you’re still current on your payments, this may be a good time to call your lenders and creditors to see if there may be options to reduce interest rates or to defer payments.
Making minimum payments – You need to pay at least the minimum payment on your credit cards each month to avoid taking a hit to your credit score. If you can, try to pay off balances in full each month to avoid the large interest charges. Interest can dramatically increase the length of time it will take you to pay off your credit card balances.
Pay with cash – Paying only with cash is a psychological trick that helps to limit spending. It is far easier to keep your spending to a minimum when you see how much cash you have and how much you’re doling out. You can also use the envelope method with cash to set a firm budget on your expense categories. Once the money is depleted in the envelope, you’re out of money to spend for that time period.
Consider debt consolidation – With a debt consolidation loan, you can pull together all your existing debt obligations into a single loan with a single payment. This can lower your interest rate and your monthly payment, while helping you to manage your debt more easily, and it eventually leads to being debt-free.
Limit spending – You may be feeling stressed and under constant pressure and in need of a spa treatment or a long weekend away, but now is not the time for such things. You should limit your spending as much as possible instead by sticking to essential items and avoiding luxuries and impulse spending. There will be plenty of time to treat yourself once things get back to normal.
Steps to maintaining and strengthening your credit score
Though you might be struggling with your finances right now, there are still ways that those with low to average credit scores can maintain or even strengthen their scores during the coronavirus pandemic.
Monitor your credit score – Everyone is entitled to a free credit report once a year. You can request it by going to AnnualCreditReport.com. Some credit cards and banks also offer access to your credit report as well. You’ll want to look through the credit report to see which factors are most affecting your credit score negatively. Once you know you can go to work on fixing those areas.
Manage your credit – Avoid applying for and opening more credit cards, and be sure to make all your credit card payments on time. Also avoid closing any unused credit cards or you can end up causing your debt-to-credit ratio to skyrocket.
Keep low balances – Pay off your credit card debt in full if possible. If you can’t pay the credit card bill in full, at least try to keep the balance as low as possible to avoid racking up more interest than necessary.
Don’t miss payments – One major part of your credit score is how reliably you pay your bills. Even one missed payment can have a negative impact that lasts for seven years. This doesn’t only include credit card payments, but mortgage and rent, utilities, car payments and other monthly obligations.
Get credit for utility payments – Credit bureau Experian offers a free product called Experian Boost, which allows you to get a boost to your credit score by factoring in utility and cell phone payments. Visit Experian Boost and follow the instructions to see if you can get a boost to your current score.
The final word
While your first thoughts during the coronavirus pandemic might not be to monitor your credit score, now is the most important time to maintain your creditworthiness. As unemployment and business closures lead to increased loan defaults, consumer lending will become more difficult due to banks tightening their lending criteria.
By actively working to minimize your debts and improving your credit score, you can potentially avoid financial pain and come out of the coronavirus pandemic no worse off, or perhaps with a stronger credit score and a better grip on your debt.