Times of uncertainty tend to create economic chaos. Just look at stock market trends during the COVID-19 pandemic. When there is a global crisis like the novel coronavirus, you need to know how to protect your personal finances, including how to protect your credit. As your personal situation changes, your credit becomes more important, because you may need to use that credit until things return to normal.
During the COVID-19 outbreak, for example, more than 36 million Americans filed for unemployment, and because of self-quarantining and social distancing, businesses are slow to reopen. In fact, as of March 25, 2020 3% of restaurant owners had permanently closed their restaurants and 44% have closed temporarily. One study estimates that more than 100,000 small businesses have closed their doors permanently since March. You may be one of those who are newly unemployed or underemployed, and your income may have been affected by the pandemic. You also may see new expenses arise as you shelter in place or start working from home. You never know when you may need good credit, including a good credit score, to get you through tough times.
The pandemic should not have an effect on your credit score, but you want to be proactive in managing your credit, including knowing how to protect your credit score.
Understanding Your Credit Score
Everything related to your personal credit is linked to your credit score, so it is important to understand how your credit score works.
Your credit score is a ranking from 300-850 that reflects how you use your credit and whether you are creditworthy. Credit scores are managed by three credit reporting agencies—Equifax, Experian, and TransUnion—and are based on a number of factors, including your payment history (your track record of paying your bills on time), the amount of personal credit you are using, and how long you have had credit. Other factors can affect your credit score as well, such as negative reports from creditors, defaults on loans or bankruptcy, and how often you apply for credit cards or loans.
To maintain a good credit score that gives you access to more credit, you ideally want a credit score of 690 or higher. You also want to be sure to maintain a good credit score for reasons other than borrowing money. For example, landlords use your credit score to determine whether they will rent you an apartment. Potential employers include your credit score in their hiring assessment. A good credit score can also mean insurance discounts and save you from paying a security deposit on utilities or cellular phone service.
Remember that your credit score doesn’t just happen. There are proactive steps you can take to improve it. You should know how to protect your credit score, even if there isn’t a pandemic.
Protecting Your Credit Score During the Pandemic
If you have lost your job or lost income as a result of COVID-19, you can accumulate debt quickly by using credit cards to pay your bills, or you may make late payments. These are the things that can have an adverse effect on your credit score.
To proactively manage your debt and maintain a your credit score:
- Make minimum payments on credit cards and other bills to maintain a strong payment history and to avoid late fees. Even if you can’t make a payment, don’t ignore credit card bills. Contact your credit card, bank, or mortgage company to discuss implementing a payment plan.
- Maintain a debt-to-income ratio (DTI) of 43% or lower. Your debt-to-income ratio is the difference between your monthly gross income and your monthly debt payments. If you can keep your DTI below 43%, then you are demonstrating that you are managing your debt responsibly. If you are planning to buy a house, most mortgage lenders like to see a DTI of 36% or lower.
- Avoid taking on unnecessary debt. If you are having trouble paying your bills, you might be tempted to apply for more credit cards or a personal loan to help pay expenses. If you want to maintain a healthy credit score, don’t take on unnecessary debt. Taking on more debt can lower your credit score, especially if it starts to raise your DTI.
- Monitor your credit score. Be sure to keep an eye on changes to your credit score and watch for irregularities. iQ and many other financial institutions provide members with their FICO credit score via online banking portals. There are also a variety of online services, such as Credit Karma, Credit.com, NerdWallet, WalletHub, and CreditWise, that let you check your score. You also can get a credit report from any of the credit bureaus.
Finding Financial Relief During COVID-19
If you have lost your job or had your finances affected by the pandemic, there are ways to get some relief from your money troubles:
- File for unemployment, if you haven’t already done so.
- Understand the CARES Act. The Coronavirus Aid, Relief, and Economic Security (CARES) Act offers debt relief programs you may consider. For example, the CARES Act suspends federal student loan payments during the pandemic.
- Contact your lenders. If you have trouble making your payments, talk to your creditors about arranging a deferred or installment-based payment plan. Credit card companies and others are willing to help customers during the pandemic. Whatever you do, do not stop paying your bills! Keep lines of communication with moneylenders open.
- Watch your credit. Be sure there are no irregularities on your credit report, such as unknown transactions or new accounts. These irregularities could be signs of identity theft. If you do see problems with your credit report, take steps to correct them and consider putting a freeze on your credit.
How iQ Credit Union Can Help
Many credit unions offer services to help their members during these unusual times, including iQ Credit Union. Here are just a few of the benefits iQ offers to members:
- Household budgeting tools. iQ offers a wide range of personal finance tools, including our Budgeting Checklist.
- Help during the crisis. As your financial partner, iQ also is extending COVID-related assistance, including emergency loans, payment deferments, and government loans.
These are challenging times for all of us, and you need a financial partner now more than ever. Be sure to contact iQ Credit Union to see how we can help you.