How to Protect my credit score if financial hardships Prevent me from paying bills

It is 2021, and everything seems to be getting back to normal. Though not over yet, the COVID-19 pandemic continues to have devastating effects on the financial health of many Americans. According to data from the labor department, the U.S job losses due to the pandemic were the highest since the Great Depression.

The financial distress resulting from any disaster undoubtedly has devastating effects on Americans but in most cases, the minority communities are most affected with a good number risking their credit scores hence the ability to qualify for loans.

Nowhere are the effects of the disaster more acute than in the minority communities, with a special emphasis on the communities of color who have for a long time endured occupational segregation, exploitation, and bigotry on several fronts, and that includes employment? While it is apparent that structural racism and bigotry still lives among us, natural disasters do not discriminate, and a good case to mention is the current health pandemic, however, without prompt action, the economic fallout disproportionately affects a segment of the population more than others.

If you are suffering or even expect to suffer hardships due to the virus, the following Q&A will address and clarify several options that you can use to protect your credit score.

It is also good to note that the Covid-19 pandemic and the ensuing financial distress is a volatile situation and therefore, policies and laws regarding this issue may change. These changes in policies may affect your financial options in the future.

“I’ve been temporarily furloughed from work and need to put some expenses on my credit card. I am worried that my score will go down if my balances go up too much or if I miss a payment. What should I do?

The worst thing about this pandemic is that it caught most people unaware, and most did not bother. We all assumed that the virus would go away soon. Even the president said that the virus would go away in the summer as such, most people eased up the tension that was building. However, as time went by, it was clear that the virus was here to stay! Most people had to put some if not all of their expenses on their credit cards which is a dangerous move to make.

However, according to VantageScore, the first step you need to make is to contact your lender and let them know your situation. Most lenders have options that will assist you in case of financial distress beyond your control. Some of the actions the lender might recommend to you include an account forbearance. This is the temporary postponement of payments whereby a person is allowed an extension of the time allowed to make a payment.

In addition to that, your lender might use a special code to report your credit information to credit bureaus. It is important that in the face of a hardship that might affect your credit to first seek out your lenders before making any dramatic moves.

What are the benefits of forbearance in the form of a deferred payment plan?

Now that you understand what forbearance is, you might be wondering what benefit would be to you in case you requested a forbearance but it comes in the form of a deferred payment plan. One thing you need to understand is that an account forbearance in the form of deferred payment will allow you to suspend or to not pay a scheduled payment on your account for a period of time. Normally, missing your payment would attract some penalties but in this instance, you will not be penalized. Another potential benefit of deferred payment forbearance is that it is possible to remove the balances associated with the account in forbearance from the calculation of your score.

How do I begin the process for a deferred payment plan or adjustment of reporting to the credit bureaus in order to prevent my credit score from decreasing?

This is a very common question and it is quite understandable. In the midst of financial distress, such as the Covid-19 people tend to get confused and really do not know where to get help from. In such situations, the first step that you should take is again to contact your lender or the company that services your loans. Lenders and servicers are uniquely positioned to help you pursue a variety of programs to help you smoothly navigate through financial distress. In addition to that, they will also advise you on how best to report to the credit bureaus. What you should do and how to do it.

If I enter into a deferred payment plan what is the potential impact on my credit score?

In most cases, this will not have any negative impacts on your credit score. It is a neutral scenario and should not cause you to panic when your score is calculated using the VantageScore credit scoring model. However, you have to pursue this situation otherwise assuming that everything will be fine might land you in serious trouble. However, there are certain situations where your credit score may go down mostly where an account with low utilization is put into forbearance. What happens is that when calculating your utilization rate, the available credit is first removed causing the credit score to go down. Nevertheless, the negative deflection on your credit score should not worry you because more often, the impact of this deflection is less severe than if you missed payment without forbearance.

If I missed payments during the deferred payment period, do those delinquencies impact my credit score when it is calculated using a VantageScore credit scoring model after the period ends?

In such a case, it is important that you first talk to your lender and discuss the various plans and terms that are available at your disposal. But by definition, you will not be owing to any payments on a loan and thus you will not be reported ‘delinquent.’

How long does a deferred payment plan last?

This decision solely relies on your lender. They will decide upon the time that your payment deferral will last. However, you can negotiate for good terms if you suspect that you may want to defer for a longer period.

What other options do I have other than a forbearance/ deferred payment plan?

Yes, there are several options available but again, this will depend on what your lender has. You can discuss with your lenders or servicers the possibility of adding a code to your account indicating that you are a victim of a natural or a declared disaster. It is also good to understand that lenders have the liberty to use this code whether the situation has been declared a natural disaster or not. Additionally, it is also good to understand that the use of this code is separate from entering into a forbearance program.

What are the benefits of adding a disaster code to the information my lender supplies to the credit bureaus?

Basically, if your credit score is calculated using the VantageScore models 3.0 or 4.0, it should not decrease because of a missed payment when the disaster code is in place. When your lenders apply the disaster code on your account, it will alert the VantageScore model that your account might have been impacted by a disaster or an equivalent situation. Therefore, the VantageScore models 3.0 or 4.0 will not take into account any current or even previously missed payments while the code is in effect. However, your balances and credit limit will continue to affect your credit score depending on how your lender reports your information to the credit bureaus.

What happens if I miss payments on my account while the natural disaster code is in place

In such a scenario, your lender holds all the power over you, and it is up to them to decide on how to report to the credit bureaus. It is up to them to decide how to report the missed payment on your account without attracting penalties. Usually, lenders are provided with a guideline on how to report your credit information while the disaster code is still in place. If the lenders report to the credit bureaus following this guideline, your credit score calculated with the VantageScore 3.0 or 4.0 will not be negatively impacted by the missed payment occurring during the disaster even when the code has been lifted.

Do all credit scoring models treat disaster codes similarly?

No! The disaster code is a relatively new innovation in an effort to promote consumer-friendly services by VantageScore Solutions. This treatment is a feature of VantageScore 4.0 and VantageScore 3.0. The earlier version of the VantageScore models does have this provision which means that your score will continue to be impacted by your payment history prior to as well as during the time the disaster code is in place.