Don't Let the COVID-19 Crisis Distract You From Taking Care of Your Credit Score
April 30, 2020
The shelter-in-place orders imposed to help control the spread of COVID-19 have caused the majority of Americans to change their spending habits. Purchases of gasoline and restaurant meals are down, while expenditures on groceries and at-home entertainment are up.
Social distancing has also contributed to the rise of contactless payment methods. Although most scientific experts agree there’s little danger of contracting the coronavirus from contaminated cash, many of us simply have fewer opportunities to handle bills and coins.
Consequently, many of us are also relying heavily on our credit cards to get us through this crisis. But bear in mind that each credit card transaction is technically is a small loan. True: most of these loans are short-term. That is, they are covered by your monthly payments, assuming you consistently meet the due dates set by your credit card company.
But higher transaction volumes lead to higher monthly balances. Higher monthly balances carry implications for your debt load and debt-to-income ratio (DTI). And your DTI, in turn, affects your credit score.
Difficult as it might be to imagine right now, there is a future beyond COVID-19. In that future, you may be presented with opportunities — such as upgrading to a new vehicle, moving into a new home, or starting your own business — you can seize only by borrowing a considerable sum of money. Any unwise financial choices you make today will only put those future opportunities further out of reach.
There’s no question that, even in the best of times, some financial decisions are tougher than others. If you’ve lost a steady source of income due to the coronavirus, they can be tougher than ever. Nevertheless, it’s important to remember that each of these decisions is an opportunity to demonstrate your creditworthiness.
Does it make sense to “spend now and pay later” during a time of such widespread uncertainty? How can you continue to leverage your “good” debt? If you need help managing your existing credit card debt, where can you turn for help? If you need help paying the regular bills that affect your credit score, what can you do? Is COVID-19 driving any change in how credit scores are calculated, reported, or used in the loan approval process? For answers to these and other credit-related questions, read on.
How Do I Check My Credit Score?
First, check to see if your monthly credit card statement includes information about your credit score. Since 2013, many of the major credit card providers, from American Express to Discover, have begun providing this information to their customers.
If your monthly statement does not specify your credit score, contact your credit card provider to discuss your options. If your credit card company does not offer you access to your credit score, check with your bank. If this information is not available via your bank, you may purchase your credit score from any of the three nationwide credit reporting agencies (also known as credit bureaus): Equifax, Experian, and TransUnion. MyFICO.com also offers several pricing plans to individuals looking to purchase regular access to their credit scores
Once you have procured your credit score, pay attention to the scoring model being employed. The most popular of these is the FICO model — which actually consists of more than 50 scoring variations — followed by VantageScore. Some creditors use their own proprietary scoring models.
Each model relies on a unique formula and weighs different factors. Depending on the lender and the nature of the credit request, one score may receive preference over another. For example, a major retail chain (Costco, Target, Walmart, etc.) that issues credit cards for use in their stores may consult a different credit score than a loan officer reviewing a mortgage application.
Finally, it’s important to note that, although credit scores are based on the data contained in credit reports, credit reports do not include credit scores. That’s because credit scores are products of statistical analysis. To use an analogy: a credit report is comparable to a report card, while a credit score is more like a grade point average (GPA).
What Is a Good Credit Score?
Credit scores can range between 300 and 850. Any score above 700 is generally considered “good.” A score higher than 800 is generally considered “excellent.”
However, each lender and/or creditor may apply their own standards when reviewing credit applications. In some instances, a score as low as 650 may qualify as “good.”
Why Does Having A Good Credit Score Matter?
Your credit score tells a story — specifically, your history managing other people’s money. As such, your credit score provides lenders with a quantitative measurement of how much risk they will incur if they decide to extend credit to you. A good or excellent credit score tells a lender that they can be confident you will make repay your debt according to their terms, without missing a payment or defaulting on your loan outright.
The higher your credit score, the more money you will likely be able to borrow. Higher credit scores also translate into lower interest rates — the fee you will pay on the sum (the principal) that you have borrowed. In short, a higher credit score grants you access to more money while making that money more affordable.
How Do I Check My Credit Report?
As noted, credit reporting in the United States is largely handled by three nationwide credit bureaus: Equifax, Experian, and TransUnion. All three are commercial entities. They are not government agencies, but they are subject to federal oversight under the terms of The Fair Credit Reporting Act (FCRA).
The FCRA requires that each credit bureau provide consumers with one free copy of their credit report every 12 months.
You can submit requests for your credit report online, via phone (toll-free), or by mail. The Federal Trade Commission (FTC) recommends that, instead of ordering each report individually, consumers use the AnnualCreditReport.com website. This service aggregator is a cooperative venture between Equifax, Experian, and TransUnion, and is considered the official source for consumer credit scores. You may also obtain your credit score from the national credit reporting companies for a fee.
The FTC further cautions consumers to beware of fraudulent websites offering free credit checks or free credit monitoring. Some of these sites may offer free products on a trial basis (or for a limited time only), then attempt to bill you for continuing services. Other, more pernicious sites exist exclusively for the purpose of collecting private information such as your Social Security number (SSN).
As the FTC notes, “Annualcreditreport.com and the nationwide credit reporting companies will not send you an email asking for your personal information. If you get an email, see a pop-up ad, or get a phone call from someone claiming to be from annualcreditreport.com or any of the three nationwide credit reporting companies, do not reply or click on any link in the message. It’s probably a scam.”
How Often Should I Check My Credit Score?
Checking your credit score carries an air of taboo — “Just looking at it can lower it!” This is not true. But, because you might have to pay a fee to access this information, the cost of monitoring your credit score can add up.
How Often Should I Check My Credit Report?
The answer to this question is more a matter of who is reviewing your credit history — and why.
When you check your own credit report, the credit bureaus will log this activity as a “soft inquiry.” Soft inquiries (also known as soft pulls) do not affect your credit score. Any creditor checking your score for loan pre-approvals also generates a soft inquiry.
“Hard inquires” (or “hard pulls”), on the other hand, can lower your credit score — anywhere from five to 20 points, depending on the applicable scoring model. A hard inquiry occurs whenever a financial institution checks your credit report in the process of making a formal lending decision. Hard inquiries are most associated with applications for mortgages, auto financing, personal loans, and new credit cards. Hard inquiries are also often subject to authorization. That is, each lender should ask for your permission before accessing your credit report.
In response to the COVID-19 crisis, Equifax, Experian, and TransUnion are currently providing free weekly credit report checks to their customers. Does that mean you should take advantage of this offer (which ends in April 2021)? Perhaps. If you have not checked your credit report yet in 2020, now is a perfect time to do so. Why? Because now is also the perfect time to examine your credit report for any errors or evidence of suspicious activity.
What Issues Should I Be On The Lookout For When Reviewing My Credit Report?
Common errors on your credit report include:
- Inaccurate, out-of-date, or missing contact information (name, permanent address, mailing address, phone number, email, etc.).
- Closed accounts that are listed as open (and vice versa).
- On-time payments that are listed as late or delinquent.
- Incorrect account ownership information (e.g., you are listed as an account owner when you are only an authorized user or co-signer).
- Duplicate accounts. This error can occur when ownership of your debt passes from one creditor to another.
- Incorrect balance or credit limit amounts.
These errors are all correctable. Correcting them, however, requires that you open a dispute with the credit reporting agency. As part of this process, you will need to provide supporting documentation, such as copies of paid bills. For a complete guide to the dispute process and how to prepare for it, please consult this guide published by the FTC.
Suspicious account activity would include any hard inquires you do not recognize or did not authorize. Such inquiries could be evidence of possible identity theft — criminals applying for credit using your stolen personal information. Unfortunately, the government’s COVID-19 relief efforts, which include economic impact payments
(otherwise known as stimulus checks), have given fraudsters all-new incentives to target individuals.
If you believe someone has hacked your identity, you can place a free fraud alert on your credit report. Doing so will require that any new applications for credit in your name go through a rigorous identity verification process. For more information on fraud alerts, how they work, and how to request one, visit the FTC’s website.
How Can I Improve My Credit Score?
The surest way to improve your credit score is to continue whittling down your “bad” debt. Bad debt is the money you spend on items that lose value or depreciate. Almost all credit card debt incurred while paying for consumer goods, from clothing to smartphones, qualifies as bad debt.
“Good” debt, on the other hand, is the debt you assume for the sake of creating future value. A mortgage is a classic example of good debt. Real estate not only tends to retain its value but also serves as a source of equity against which you can borrow. Student loans, although they can be very expensive, are also considered good debt, as a college degree typically boosts your earning potential.
Good debt comes with a certain amount of effective management built-in. For example, borrowers have between 15 and 30 years to pay off their mortgage. Bad debt is more volatile. Controlling it, much less eliminating it, can be a daunting task. View doing so as a marathon rather than a sprint. Make sure you can account for all of your debts and develop a plan to pay each one down so that you can reduce your DTI ratio.
Also, pay attention to your credit utilization rate — the ratio of your outstanding debt to the total amount of credit available to you. You should aim to keep your utilization rate at about 30 percent. The higher your utilization rate, the lower your credit score. One way to offset that effect is to request more credit. If you anticipate that you’ll be using more credit to cover essential purchases over the coming months, talk to your credit card provider about increasing your credit limit.
I Feel Like My Debt Is Unmanageable. How Can I Get it Under Better Control And Keep My Credit Score From Being Lowered?
First, contact your lender, credit card provider(s), and bank to inquire about any accommodations they are making for customers experiencing financial hardship because of COVID-19. More information about these accommodations can be found in this previous installment in our COVID-19 content series: “COVID-19 Has Made Managing Your Household Expenses Trickier Than Ever—Here’s How You Can Stay Safe And Healthy While Sticking To A Budget.”
It may also be worth transferring some or all of your credit card debt, moving balances from a high-rate card to one featuring a lower — perhaps even 0 percent — introductory rate. However, to take full advantage of these balance transfers, you must plan to pay off the total amount within the promotional window. These windows will vary from card provider to card provider but typically span between 12 and 18 months.
Debt consolidation is another option. Debt consolidation involves taking out either an unsecured personal loan or a loan backed by collateral, such as your home equity. You use this principal to pay off your existing debts, then begin paying off the new loan.
In many cases, consolidating debt allows you to refinance that debt and therefore reduce your monthly expenditures. Moreover, working with a single loan servicer eliminates the need to keep up with multiple minimum payment amounts, interest rates, late fees, and due dates.
However, and as many advisers note unless your plans for your financial future include a budget, you could rack up excessive debt again and cancel out the benefits of consolidation. Again, late and missed payments will negatively affect your credit score.
If you are interested in debt consolidation, you can explore your options with this interactive online calculator created by Bankrate.
What Happens If I Can’t Pay My Bills Because Of COVID-19?
Months of missed payments can send your accounts into delinquency — and force them into collections. This outcome can be particularly damaging to your credit rating. Debt collection accounts can remain on your credit report for up to seven years. As such, they are ticking timebombs primed to detonate as soon as you apply for a mortgage, car loan, or new credit card. Avoiding delinquency should therefore be one of your top priorities.
Fortunately, both the federal government and the individual states — including Texas — have implemented measures to help alleviate the financial distress caused by COVID-19. You can learn all about these relief efforts and assistance programs by consulting the previous installments in our content series.
- If you are concerned about being able to pay your mortgage, lease, or rent, please see: “What Does the $2 Trillion Government Response To COVID-19 Mean for Homeowners?”.
- If you are concerned about being able to pay for essentials such as groceries, medical prescriptions, electricity, water, and gas, please see: “COVID-19 Has Made Managing Your Household Expenses Trickier Than Ever—Here’s How You Can Stay Safe And Healthy While Sticking To A Budget.”
- If you are concerned about being able to pay your student loan, please see: “What Do The New COVID-19 Laws And Regulations Mean For Your Personal Finances?”.
- If you are thinking about tapping into your retirement savings to borrow emergency funds, please see: “What Investors Can Do To Safeguard Their Retirement Savings From COVID-19-Related Market Volatility.”
- If you need to apply for unemployment benefits and want to use that money to help pay down your debt, please see: “What Do The New COVID-19 Laws And Regulations Mean For Your Personal Finances?”.
- If you are the owner of a small business or an independent contractor, please see: “How Does The Government’s Response To The COVID-19 Pandemic Help Small Businesses?”.
If you have additional questions about your credit score and/or credit report, you can find more answers here on the Guaranty Bank & Trust website.
- “Credit Scores 101”
- “How to Get Your Free Credit Reports Yearly”
- “5 Ways to Repair Your Credit”
- “How Debt-to-Income Affects Your Credit”
As always, stay vigilant. Monitor your accounts for suspicious activity and beware of scammers attempting to take advantage of the current situation. And stay proactive. Keep the lines of communication open with your mortgage company, your credit card providers, and your bank. If you are a Guaranty Bank & Trust customer — or would like to become one — remember that you can always reach our friendly, caring, and collaborative team members at 888-572-9881.