As the novel coronavirus continues to impact households across the country, many people are scrambling to figure out their finances: how to save money, apply for unemployment benefits, and sign up for hardship assistance from creditors (such as mortgage loan forbearance).
While credit scores might not be top-of-mind right now, understanding how these actions — or inaction — can impact your credit is also important. Especially as creditors look to reduce future risk by enacting stricter underwriting requirements.
The CARES Act Makes a Few Credit-Related Changes
The Coronavirus Aid, Relief, and Economic Security (CARES) Act amends the Fair Credit Reporting Act (FCRA), the main federal law that governs credit reporting, and the changes last until 120 days after the national state of emergency ends.
The amendment impacts how companies should report accounts when you’re given an accommodation due to the coronavirus, such as a lower payment, loan modification, or another form of assistance or relief.
Once a creditor offers an accommodation:
- If your account is current when the assistance begins and you follow the terms of the accommodation, then the creditor should continue to report you as current.
- If your account was delinquent, the creditor can continue to report the account as past-due. However, if you bring the account current, it should update the credit bureaus and let them know you’re now current.
Keep a record of any communications you have with your creditors. If they offer you assistance, you’ll want to have proof of the agreement in case they later report a negative mark on the account when they shouldn’t. Although, if you need to dispute a credit report error, know that the credit bureaus may be allowed to take more than the standard 30 days to investigate consumers’ disputes.
Partial and Missed Payments Can Still Hurt Your Credit
Creditors can still report you late once your bills are 30 days past due. Even if you have an accommodation, not following through with requirements can lead to credit-damaging marks. Similarly, having an account sent to collections or declaring bankruptcy can still hurt your credit.
When you think you might have trouble paying a bill, the first step you should take is reaching out to creditors and asking about hardship options. Many creditors understand the dire situation consumers are facing, and they’re offering a variety of accommodations.
Creditors may temporarily lower your interest rate or minimum payment, making your payments more affordable, or offer a deferment or forbearance that allows you to skip payments. However, you have to ask for assistance first. (One exception is with certain federal student loans, as the CARES Act automatically suspends those loan payments and gives you 0% interest through September 30, 2020.)
While hardships plans and offers can be a good short-term solution, your debts aren’t forgiven, and interest will generally still accrue. Before signing up, you’ll want to ask about what happens at the end of the relief.
Creditors may add extra payments to the end of your loan’s term or let you pay off the extra amount over time. But others may first ask for a lump-sum payment for the full amount—which might not be realistic for many borrowers.
Creditors Can Add Disaster Codes to Your Credit Reports
While you’re speaking to your creditors about your options, you could ask them to add a natural disaster code to your account.
Natural disaster codes are codes that creditors (not consumers) can add to your account to indicate that you’ve been affected by a natural disaster. Disaster codes don’t impact FICO Scores, and negative marks will continue to hurt FICO credit scores. But VantageScore credit scores consider negative marks as “neutral” if the account has a disaster code.
Credit scoring aside, a disaster code can help creditors reading your credit report understand the context of negative marks. Creditors may take this into consideration when deciding how to manage your account or to approve or deny a loan application.
Your Health and Safety Are More Important Than Your Credit
While maintaining good credit is important, if you’re deciding between buying groceries and keeping a roof over your family’s head or making loan payments, you may need to prioritize your household’s wellbeing over your credit scores. And that’s okay.
However, reaching out to your creditors and getting help from trained credit counselors might make it possible to address both concerns at once. Creditors may be willing to work with you, and counselors can act as an advisor or intermediary if you need help. Even if you’re not facing hardship right now, you could start with a free budgeting counseling session to discuss your personal finances and options.