What’s best for you and your family in the months ahead may not be good for your credit score. Remember that if you have to do something financially in the months ahead that hurts your record as a borrower.
Credit scores are woven into everyday life and have become almost a national obsession. They’re vital in securing a good rate when you borrow, and they’re increasingly used as an assessment tool by employers, landlords and insurance companies. Without question, you want to keep your score in good shape.
But your own personal needs in hard times may conflict with what’s best for your credit score. That’s okay. Credit scores will bounce back in time.
Can’t pay your bills on schedule? Contact your lender, your credit card company or utility and ask what they’re doing as a result of the coronavirus to help people in financial difficulty. Scott Hannah, B.C.-based CEO of the non-profit Credit Counselling Society, said he expects lenders will be lenient in how they report data to the credit-monitoring firms Equifax and TransUnion on clients who need to delay payment.
“I don’t see creditors punishing consumers for being as responsible as they can under circumstances beyond their control,” Mr. Hannah said.
Looking ahead to people losing their jobs or having their incomes cut, the big banks have announced they will allow people a six-month deferral of mortgage payments. These cases will be handled on a case-by-case, bank-by-bank basis and no definitive word has been issued on how credit scores will be affected if you take up these offers.
However, people in the lending and credit sectors say credit scores should not be negatively affected because the mortgage payments aren’t being missed – just deferred. Also, some mortgage lenders don’t report mortgage payment data to credit monitoring agencies.
What if getting relief on payments did bring down your credit score? Mr. Hannah said the impact would be less negative than if you failed to pay your bills at all. “Once a creditor makes the decision to refer a debt to a collection agency, it’s now being reflected as bad debt and you can’t reverse that.”
A first step in protecting your credit score in the months ahead is to get a copy of your credit report. The credit score is a number out of 900 that grades you on how you manage credit, while the credit report summarizes all the credit accounts you have.
You can order a credit report directly from Equifax or TransUnion – a free copy should be available – while banks, credit card companies and other financial firms sometimes offer them to clients as a complement to the credit score information they provide.
The accounts listed on your credit report are the ones you need to look after to keep your score in good shape, but they’re not all of equal importance to your score. For example, Mr. Hannah said paying your credit card carries more weight that paying your cellphone bill.
Mr. Hannah encourages people to resist the temptation to use cash in savings accounts to pay down a credit card bill at the moment. “One of the things we’re advising clients right now is to conserve cash,” he said. “It would not be the best thing to do if you paid off everything on your credit card to keep it up to date.”
Credit card interest is brutal at about 20 per cent, but Mr. Hannah said it’s more important to have a cash reserve right now to see you through any income disruptions.
If you see trouble ahead in paying your bills, he suggests going to a non-profit credit counselling agency right now to help with budgeting and saving. There is no cost for this type of consultation at his agency, and neither is there an impact on credit scores.
People swamped by debt may find it helpful to have a credit-counselling agency work on a plan to repay creditors. This would typically lower a credit score, but Mr. Hannah said the greater good is served by getting your debt problem under control.
“I can’t tell you how many times over the years that we’ve had consumers come into our organization looking for help and we’ve suggested a course of action that will solve their debt problems but have a negative impact on their credit score for a period of time,” he said. “It was really difficult for them to make a decision, even though keeping that credit score was not going to improve their financial well-being in the long term.”
PERSONAL FINANCE COLUMNIST
The Globe and Mail, March 21, 2020