How Can Coronavirus Affect Your Credit Score?
Once, I wasn’t worried about knowing my credit score. A decade ago, I was homeless, unemployed, broke, and living in my mother’s house. Knowing my credit score wasn’t a priority.
There wasn’t a world-changing pandemic to worry about (no excuse, however). I telecommute now and am better informed.
However, millions of unemployed Americans now won’t be able to pay off their credit and may see their credit scores affected.
All because of the globally reaching economic disruptions caused by the novel coronavirus pandemic or COVID-19.
Through no fault of their own, millions of Americans will probably see their credit scores adversely affected.
There will be no help coming from the government either.
Americans should get a one-time $1,200 check within the next few months. There will be no credit score protection measures included.
The credit card industry itself had an influential hand in this decision.
So, how will the coronavirus outbreak affect your credit score? Consider:
- Involuntarily Payment Delinquency
- Significant Credit Score Reduction
- Increased Credit Score Rehabilitation Time Periods
First, let’s explain the credit score and its importance.
Credit Score Basics
Your credit score is the arbitrarily weighted average of data like your past credit card use, credit history, level of debt, and payment history.
It’s a 3-digit number. The higher the number, the better your score.
Credit scores range from 300 to 850. 850 is considered excellent credit.
Your score is a gauge of creditworthiness or application risk to a credit card company, mortgage lender, and so on.
The average, “good,” credit card score is 695. Any number under 695 is considered bad.
The economic crisis caused by the coronavirus is going to make matters related to credit scores worse.
Involuntarily Payment Delinquency
Unfortunately, millions of Americans are becoming involuntarily unemployed due to the coronavirus pandemic.
That means that millions of Americans will become involuntary payment delinquents for the foreseeable future.
Millions of collective credit scores will incrementally get lower and lower the longer this crisis plays out.
35% of your credit score is calculated on the timeliness of your payment history.
Significant Credit Score Reduction
Missing several payments on multiple credit cards will automatically lower your score.
However, your level of debt makes up about 30% of your score calculation.
Missing payments and significant debt equal lower score. Everyone knows that right?
What many people don’t know is that FICO, the company that created the credit score, recently reformulated their metrics for calculating those scores.
In January 2020, weeks before the coronavirus was recognized as a global problem, FICO increased penalties for those with high debt.
These new FICO scoring metrics were announced before the coronavirus took over the world.
Many consumers may be unaware.
If you lost your job, you’ll become an involuntary payment delinquent, amass higher debt, and then be severely penalized by FICO’s new scoring metrics.
Increased Credit Score Rehabilitation Time Periods
The worst thing about the coronavirus pandemic, other than the fact that it exists, is that it also infects people with anxiety.
We don’t know when it will end, when a vaccine will surface, or when everyone can get back to work.
The only way to end payment delinquency and increasing debt is to get back to work right?
Even if the coronavirus pandemic ends tomorrow, there’s no guarantee that “nonessential,” workers will get new work anytime soon.
It will take time to find new work, get finances in order, and then save money.
And, finally, begin making payments on delinquent credit card debt.
One must begin credit score rehabilitation before improving their score.
However, the longer one is out of the work due to coronavirus economic disruption, the longer it’ll take to actually begin credit score rehabilitation.
Which again, can take years to accomplish.
Still, there are some things you can do to help yourself.
The coronavirus pandemic, and the ensuing global economic crisis, has made millions of Americans unemployed and taken control of their lives from them.
It’s like a self-perpetuating cycle of involuntary unfairness. Especially when it comes to credit scores.
However, there are some measures of control you can affirm.
Credit Report Inspection
Get a copy of your credit report, look for errors, and report any.
You’re entitled to a free copy annually. Some credit cards offer free credit report access as a membership perk.
Talk to Your Credit Card Company
Talk to your credit card company representative or customer service operator.
Don’t just assume they won’t help or offer options. They may be able to defer payments for a few months.
Credit Report Consumer Statements
You may be able to make a “consumer statement” or “disaster statement,” that will appear on your credit report. Ask your credit card company about it.
This is a dated, general statement that might say, “My financial life has been adversely affected by the coronavirus pandemic.”
Anyone analyzing your credit report in the future should appreciate that your bad credit, and the dates it worsened, was involuntary.
Still, worry about your health, your family, and finding new working opportunities. Learn about telecommuting if you can.
Don’t ignore your credit score. I made that mistake long ago.
You just don’t have to treat it as the utmost priority right now either.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.