How to Protect Your Credit Score During the Covid-19 Recession
- Recessions can do major damage to credit scores.
- If you're having problems making payments, reach out to your creditors.
- Use credit conservatively and keep balances as low as possible.
Your credit score is a three-digit number that lenders and creditors use to determine how likely you are to repay debt. The higher your credit score is, the more attractive of a borrower you are. By protecting your credit score, you can save hundreds or even thousands of dollars over your lifetime. Here’s a brief overview of the credit score ranges from Experian and what they mean:
740-799: Very Good
Let’s take a closer look at how to protect your credit score, even during the COVID-19 recession.
How is a credit score calculated?
There are five factors that help determine your credit score.
1. Payment history
Payment history is the most important factor in your credit score. Every time you miss or are late on a payment on your mortgage, personal loan, credit card, or another bill, your score will likely take a dip.
What to Do
If you’re having trouble paying your debts on time, reach out to your creditor for forbearance. They may give you more time to pay or allow you to skip your interest payments and only pay on the principle. It’s likely that your lender will be willing to work with you during these uncertain times, especially if you have a track record of paying on time.
2. Credit utilization
Credit utilization refers to the amount of available credit you’re actually using. To find your credit utilization, divide your current debt balances by your total credit limits. Most financial experts suggest a credit utilization ratio of no more than 30%.
What to Do
If you find that your credit utilization is too high, focus on paying down your debt. To help pay down debt, you may want to reduce your expenses or pick up a side hustle.
3. Length of credit history
Length of credit history is the amount of time your accounts have been open. The longer your accounts have been open, the bigger the benefit to your credit score.
What to Do
At this time, it’s probably best not to close any accounts with zero balances. If you do, you may see a drop in your credit score. This is because you’ll remove a credit account that helps contribute to the average age of all the accounts you have open.
4. Credit mix
The different types of accounts that make up your credit history are your credit mix. These accounts may be mortgages, car loans, student loans, personal loans, and credit cards. A diverse credit mix can improve your credit score.
What to Do
Since you may need credit to make some large purchases or cover an emergency expense, it could be a good idea to look at your current credit mix. If it only contains credit cards, it may make sense to take out a small personal loan. Just remember to only borrow money when you absolutely need to and make your payments on time.
5. Credit inquiries
There are two types of credit inquiries: soft inquiries and hard inquiries. While soft inquiries won’t show up on your credit report, hard inquiries will and may lower your credit score temporarily.
What to Do
It is best not to apply for multiple credit accounts in a short period of time. If you do, and your lenders pull hard inquiries, your credit score may go down.
What you can earn with good credit
It can be difficult to figure out how to protect your credit score, especially when times are tough. But it’s certainly possible with some hard work and dedication. Once you improve your credit score, you may see these benefits.
Lower interest rates: The higher your credit score is, the lower interest rate you’re likely to earn when you apply for a loan and credit card.
Higher credit limits: With a high credit score, you can access more credit and potentially lower your credit utilization ratio.
Greater chance of approval: Almost every lender will consider your credit score before they decide whether or not to approve you for a loan. Good credit can raise your likelihood of getting approved.
Access to credit card reward programs: Since credit card companies prefer borrowers with good credit, you may qualify for most reward programs and earn cash back or points that can be used toward travel and other expenses.
As you can see, good credit is one of the keys to a healthy financial future. It can make your life easier and save you plenty of money down the road.
How to check your credit score
To find out what your credit score is, visit AnnualCreditReport.com. This is a government mandated website that allows people to request their credit reports from the three major credit bureaus for free every 12 months. Due to the pandemic, however, you can now check your credit reports for free every week until April 20, 2021.
You can fill out the online form or the Annual Credit Report Request form and mail it in. Another option is to call 1-877-322-8228.
Take control of your debt and boost your credit score
Learning how to protect your credit score, deal with debt, money, and planning for your future doesn’t need to be hard. We have developed a simple to follow guide to help you find the tools you need to move to better manage your debt and move towards a better financial future. Get started by downloading our free guide.
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