A good credit score can help you qualify for lower interest rates on loans and rewards credit cards that earn cash back, points or miles when you spend. It can also help you when buying a home and applying to jobs. It's therefore smart to want to improve your credit score as much as possible.
But if you're one of the millions of Americans suffering financially from the coronavirus pandemic, you shouldn't worry too much about your credit score right now, says Chi Chi Wu, a staff attorney at the National Consumer Law Center (NCLC).
Below, CNBC Select hears from Wu on why you can take a break from stressing about your credit score and what you should focus on instead.
'The score should be the last thing you think about'
If you've recently lost your job or you are just struggling financially, your first priority should be making sure that all your basic needs are met.
It may seem obvious, yet when people are overwhelmed in an emergency, it's normal to focus on what you feel like you can control. Monitoring your credit score may seem more manageable than worrying about layoffs or having to make big changes to the family budget. But now's the time to prioritize, says Wu.
"If you own a home, pay your mortgage first," Wu tells CNBC Select. "If you own a car and have a car loan, pay that first because you can't move without your car. But the score should be the last thing you think about. The most important thing is to provide for the necessities."
And for the people who still have a paycheck coming in and all the resources to keep paying all their bills on time, there's advice for them, too. While it's good practice to maintain a healthy credit score, Wu suggests you try to not be entirely consumed by it right now; what's more important is ensuring your family is healthy and safe during this outbreak.
Tools you can use to help with your debt
While there are financial planners and credit counselors happy to speak with people battling debt, there are also free, accessible tools online that you can use at any time.
The NCLC offers its own debt management advice in an online resource book, "Surviving Debt." It is now available for free during the coronavirus emergency. The online book provides tips for people who struggle to pay their bills by talking about how to prioritize your debt.
According to the book, there are three kinds of debt:
- High priority debts
- Debts that quickly become high priority
- Lower priority debts
Your high priority debts include rent payments, utility bills, car loans and car leases. These bills, if not paid immediately, would have sudden and severe consequences for you and your family. The NCLC suggests negotiating a lower payment on these debts if you are unable to make the full payments.
Debts that quickly become high priority include federal student loans that have flexible repayment plans, or other personal loans that don't directly tie to one of your essential needs. You can usually call your lender and delay these payments, but you'll only want to do this for a few months before they start to have lasting impacts on your financial health.
Low priority debts, such as credit card debt, are those that you pay once you've covered your other higher priority debts. It's important to note that credit card debt has the highest APR, so while it is "low priority" compared to other urgent needs, you'll still want to call your card issuer to come up with a temporary plan before stopping your payments.
Prioritizing your debt payments
When your income takes a hit, Wu says it may seem way more reasonable to make a $36 minimum payment on your credit card than to pay your $1,000 mortgage bill.
This is not uncommon when people are in crisis, Wu tells CNBC Select. Sometimes people think, "If I can't pay my mortgage, at least I will keep up with my credit cards."
But the NCLC advises, "Never pay smaller, low priority debts just because you cannot keep up with high priority debts." If you think you might have trouble paying your high-priority bills (mortgages, car loans, utilities), start by calling your lenders and asking for help.
If you do have room in the budget to pay off credit card debt, but want to save on interest and pay it down even faster, you may want to consider a balance transfer card that gives you a promotional interest-free period.
The U.S. Bank Visa® Platinum Card offers a 0% intro APR for 18 billing cycles on balance transfers and purchases (then 18.74% to 28.74% variable APR) and the Citi Simplicity® Card offers 0% intro APR for the first 21 months on balance transfers from the date of first transfer (then 19.24% - 29.99% variable APR; see rates and fees). Balance transfers must be completed within 4 months of account opening and 0% intro APR for the first 12 months on purchases (then 19.24% - 29.99% variable APR). There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Most balance transfer cards require good or excellent credit (scores 670 and above) and charge a 2% to 5% fee (or a $5 minimum) for each transfer, but there are some balance transfer cards with no fee that are probably better fitted if you have a larger debt load.
Where to find financial help
If you're struggling financially and can't make at least your minimum payments, call your lender or credit card issuer to request a forbearance (temporary relief like waived late fees and lowered interest) or a payment plan.
Many credit card issuers are offering financial assistance during coronavirus, such as deferment or forbearance, but you won't be automatically enrolled. You'll need speak with a representative through chat or on the phone.
Even while in forbearance or deferment, you may still accrue interest on your unpaid balances, so be sure to factor this into the equation and consider your credit utilization rate.
Deferment and forbearance look better on your credit report than late payments
The good news is that if you are approved for a payment postponement plan, such as a deferment or a forbearance, you will not be penalized for it.
Under normal circumstances, lenders cannot report your late payments to the credit bureaus until 30 days after the payment is due, but with Congress's coronavirus relief bill, there is a new provision (Section 4021) that amends the Fair Credit Reporting Act slightly for these temporary emergency conditions.
The section states that if you are granted deferment or forbearance, your lenders cannot report any missed payments as delinquencies during this period to the credit bureaus. In other words, if you are considered "current" right now, and you enroll in a qualifying assistance plan, you will still be reported in good standing for up to 120 days after the declared national emergency officially ends (assuming you followed the plan you and your lender agreed to).
There's also good news for people who are currently behind on their credit card bills. Though you can't get any negative marks on your credit report from enrolling in an assistance program, the law states you can see your score improve if you honor your agreements with your credit card issuer. So even if your account is already in delinquency, you can call to arrange a payment plan and possibly benefit from having your payments reported to the bureaus under a new, more flexible plan.
Bottom line
If you're financially burdened by the coronavirus pandemic, know that you are not alone. While your credit score is important in the long-term, during emergencies such as this it is important you cover first your basic necessities.
To find relief, it's important to reach out to your creditor and ask for a payment plan that works for you. Customer service representatives are quite busy given the circumstances, but with persistence you should be able to find a solution.
