Protecting Your Credit During a Major Setback

The following is presented for informational purposes only.

A major life setback is stressful enough without having to worry about finances, but unfortunately, that’s the time you need to take the most care with your money and your credit. Becoming unexpectedly unemployed or dealing with an illness or disability that keeps you from working can wreak havoc on your credit score.

Before things go from bad to worse, here’s what you need to do to protect your credit score during a major setback:

  1. Talk to creditors about payment protection insurance. It comes with a fee, but it puts your payments on hold for a set amount of time allowing you a little more freedom with your finances. Payment protection is available on most credit cards, car loans, and mortgages. However, many companies won’t offer it if you’re unemployed since there’s no way to know when you’ll be working again. Talk to your creditors for more information.
  2. Request a copy of your credit report. Annual Credit Report offers you one free report per year and you need to know what your report looks like so you can be proactive about protecting it. If you’re unemployed and searching for a job, you’re also entitled to a free annual report through the three major credit bureaus. If there is an error on your report, you can request to have it corrected. And if there is correct information that could be damaging to future employment, you’re allowed to write a 100-word statement explaining your circumstances and it will be added to your report.
  3. Hide your credit cards. You’ll need to tighten your spending so, for now, it’s best to stick with cash only so you don’t build up more debt. Spending only what you have helps you to be more disciplined about your spending. Just make sure the cash you’re spending doesn’t come from cash advances on your credit card as that will put you further in debt and the fees will add up quickly.
  4. Talk to your creditors. Even if they won’t offer payment protection, talk to your creditors about your options. They want to work with you to make sure they get paid as well so they may have other options available to you.
  5. Make your minimum payments. It’s important to continue to make at least the minimum payment required to protect your credit score. Maintaining the necessities (food, rent, medications, etc.) should be the priority, but for the purposes of keeping your credit score in order, if you aren’t making the minimum agreed upon payment (and your creditor may be willing to alter this if you qualify for a hardship program), then your score will likely take a hit.
  6. Consider deferring. You may be able to defer some of your debt, like school loans, until you have income again. You may also be able to defer your mortgage or car payments for up to 90 days. Any payments you don’t make will be tacked on to the end of your loan term and your loan will just be extended by that amount of time.

If your setback is due to a divorce, there are a couple other things you need to do:

  1. Close any joint accounts immediately. Regardless of who makes the charges, you are both equally responsible for the debt, so cancel any joint credit cards and prevent any additional debt or fees from being accrued.
  2. Contact your creditors. Send a certified letter informing them of your divorce and ask them to provide a current account statement. Also let them know that you have no intention of being held liable for any debt that occurs after the date of your letter.
  3. Keep your information current. Notify your creditors of any address changes so you can be sure to get a monthly statement of your accounts.

A major setback doesn’t have to set your credit back as well. Taking action to protect your credit score now will make it easier to recover from your setback. And if you’re experiencing a significant and unexpected financial event, consider speaking with a nonprofit budget counselor. Counseling is free and available online 24/7.

Emilie is the brains, the brawn, and the beauty behind She Does Better, inspiring millennial women to live financially, physically, and professionally fit lives. She writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. Read more about her journey here.

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