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Credit scores continue to function the same way even in the time of a massive financial crisis. However, credit scores may start to be managed differently now due to the prevailing uncertainty caused by the COVID-19 pandemic.
With this financial crisis, it would become difficult for you to pay all your bills in full, so you need to plan your finances accordingly. You might have to settle for a lower credit score temporarily. Gaining an understanding of your credit score in your current circumstances will assist you in decreasing the damage and set yourself up for quick recovery.
Should you take credit or use your emergency fund?
Many people are questioning if they should use credit or access their emergency funds at the time of this crisis. Some suggest that this is precisely the kind of situation for which one saves an emergency fund, while others emphasize cost-cutting as the first step.
Since everyone is in the same boat, you could expect some leniency from your creditors. You can reach out to your landlord, who could be willing to give you some exemptions, deferments, or a temporary arrangement. Make sure you tap into all your options before going towards your emergency fund.
According to a recent online survey, around 3 in 10 Americans have accessed their emergency funds since the economic crisis was brought by the coronavirus situation. However, 18% of Americans (1 in 5) didn’t even have an emergency fund, to begin with.
Minimize your score damage
If you don’t want to use your emergency fund or if you don’t have such a fund, you might be forced to go for credit. In that case, it is important to minimize the damage to your credit score as much as possible. If you have a sound understanding of your credit, you’ll be able to do it much more efficiently. The top two factors that affect your credit score, include:
- Timely payments: Late payments can affect your credit score massively. If you’re overdue on your payments for 30 days or longer, it will damage your score significantly. This kind of damage is extremely difficult to overcome as its effects can last as long as seven years.
- Use of your credit limits: If you’re utilizing your credit to the maximum, your credit score is bound to go down. However, you can cover this damage by decreasing your balance again.
It is strongly recommended that you make timely payments to your creditors, to avoid long-lasting and unrecoverable damage to your credit score. If you’re in extreme crisis, you can cut down the payments to the minimum required amount, as that would be a much better choice than making no payments.
Minimum payments also hurt the credit score, but the damage inflicted by them is much easier to recover.
Manage your balances
Although you might be making minimum payments and utilizing your scores to the maximum, there might still be options for you to keep your credit down compared to the limits:
- Request for higher credit limits: If your request for a higher credit limit comes through, it will help you decrease your credit utilization significantly. According to a recent survey, 17% of Americans asked for higher credit limits after the coronavirus crisis.
- Make your account authorized: You can become an authorized user if an acquaintance, relative, or a friend who has a higher credit limit, agrees to authorize you as a user. Doing so wouldn’t require them to give you a card or allow you to make purchases per se, but it will surely help your credit score.
- Don’t close your credit cards: Unused cards help you much more than getting them closed would. By keeping your credit cards open, your credit score will benefit as it would assist your overall credit limit. You could use the card occasionally just to prevent it from getting closed due to inactivity.
- Look for options other than credit cards: Credit cards aren’t always the best option. Your best shot in this situation could be to take out a loan. The interest rates are much lower on these loans compared to credit card hardship plans. You could also apply for a personal loan for debt consolidation online, or via a credit union or bank.
Minimize the costs of using credit
In the current situation, many creditors are revising their terms and policies. Make sure you reach out to your creditors to check if they’re offering lower interest rates or eliminating any fees. You could also switch from taking out a cash advance to making your purchase directly via the card, as it might have much less interest rate. Find out all these terms by calling the customer service of your credit card company.
You could also consider transferring your high-interest credit to lower interest credit cards. This tactic could also be used to renegotiate terms with your creditor and erase your debt. You could also consider credit card relief which has become a popular debt consolidation alternative
Monitor your credit reports
In the light of the current extraordinary circumstances, you are entitled to request weekly credit reports from three major credit bureaus until April 2021. Make sure that:
- All the mentioned accounts are yours, and your personal information is correctly entered.
- Your accounts in forbearance or deferment are recognized as current, as dictated by the CARES Act.
- If you’ve requested a disaster code, make sure it is showing on your credit. This will intimate your potential lenders or landlord about the changes in your credit and will keep your credit score away from damage. Many companies are offering to guide customers in the management of their credit during this crisis, like VantageScore and FICO.
If you find any mistakes in your account, you’re entitled to take action against it. If you suspect identity theft or addition of addresses you’ve never been a resident of, make sure that you report such errors to