Even in a financial crisis, credit scoring still works the same as it always has. But managing your credit may look a little different now as the coronavirus pandemic leads to widespread financial upheaval.
As money gets tighter, especially if you can’t pay every bill in full, you’ll need to be strategic — and perhaps accept a lower score temporarily. Understanding how credit works can help you minimize damage and position yourself for quicker recovery.
Using credit vs. emergency fund
If you have an emergency fund, should you tap it before using credit? “I think there are two schools of thought here,” certified financial planner Lynn Ballou of EP Wealth Advisors in Orinda, California, said in an email. “If not a global pandemic, then what in the blazes is an emergency fund for anyway?”
On the other hand, Bruce McClary, vice president for communications at the National Foundation for Credit Counseling, suggests proactively cutting costs first. Your landlord and utility companies, for instance, may be willing to make temporary arrangements, he says. “Have these conversations before you spend a dollar of your emergency fund.”
About 3 in 10 of us (30% of Americans) have tapped emergency funds due to the economic effects of the coronavirus pandemic, according to a NerdWallet survey conducted online by The Harris Poll from April 8-10. But almost 1 in 5 Americans (18%) had no emergency fund to tap.
Be strategic to limit score damage
You may be relying on your credit more than ever. Knowing how credit scoring works will help you pick actions that limit damage to your score. The two biggest factors affecting your credit score are:
Paying on time. A late payment — one that’s 30 days or more past the due date — can tank your score. The damage is lasting: It will linger on your credit reports for up to seven years.
How much of your credit limits you use. The less credit you use, the better it is for your score. When your credit utilization goes up, your credit score will likely go down — but the damage is quickly reversed once you can lower balances again.
Do everything you can to pay creditors on time, so you avoid the biggest, longest-lasting score danger, which is paying late.
Paying minimums is fine. It’s much better for your credit to pay minimums on all of your cards than to pay one in full and not have enough to cover the minimum on another. While it’s true that paying minimums leads to rising balances, the score damage from that is quicker and easier to reverse.
Manage your balances
Even while you’re putting more on cards or paying minimums, you may still have some latitude to keep credit balances low relative to limits:
Ask for higher credit limits from your card issuers. If you qualify, getting a higher credit limit can help you keep credit utilization lower. The recent survey found that 17% of Americans have requested a higher credit card limit due to the economic effects of the coronavirus pandemic.
Become an authorized user. See if a friend or relative who has a credit card with a high limit and low balance will add you as an authorized user. The account holder is not required to actually give you a card or let you make purchases. Just being on the account benefits your score.
Keep credit cards open. Even old, unused cards may be helping your credit score by contributing to your overall credit limit. Use them occasionally to keep the issuer from closing them for inactivity.
Think beyond credit cards. An unsecured personal loan, sometimes called a signature loan, may be a better option, McClary says. The interest rate is likely to be much lower than credit card interest. You may be able to find a low-rate loan by searching online for “pandemic personal loan,” or contact your bank or credit union.
Minimize the costs of using credit
If you’re using credit cards to stay afloat, know how the cards operate, McClary advises. For example, taking out a cash advance will cost you far more in interest than a purchase of the same amount. You can find out by calling the customer service line or looking up the customer agreement online.
Also, don’t assume that the terms you have now are the best you can get. Rather than simply checking APRs, Ballou recommends reaching out to your current issuers to see if they will give you lower rates or lower minimum payments or eliminate fees. You might be able to move some debt from higher-interest to lower-interest cards, she said, adding that telling an issuer you are considering transferring your balance to a competitor can be a good negotiating tool.
If you apply for a credit card hardship program, it’s important to know the drawbacks and decide whether you want to apply for help from your card issuer now if you might need it later.
And if you have autopay in place for bills, adjust the payments or turn them off to avoid paying more than is required or overdrawing your account.
Monitor your credit reports
You are now entitled to one credit report every week from each of the three major credit bureaus through April 2021. Check them to be sure:
You recognize every account and your identifying information is correct.
Any account in forbearance or deferment is being reported as current, as required by the CARES Act, if it was in good standing before any pandemic-related concessions were made.
A disaster code shows on your credit reports if you requested one. This can help a potential lender or landlord better understand changes in your credit behavior, McClary says. And it won’t hurt your credit scores. Major credit scoring companies FICO and VantageScore have guides to help consumers manage credit during disasters.
Harris survey methodology
This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from April 8-10, 2020, among 2,042 U.S. adults ages 18 and older. This online survey is not based on a probability sample, and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Madison Gouveia at [email protected].