For many Canadians, keeping a high credit score is almost as important as keeping a high balance in their bank account. But with COVID-19 now impacting the finances of many Canadians, you may be wondering how the pandemic might impact your credit score. We’ve got the 411.
A good credit score helps you get approved for low-interest credit, whether it’s a credit card, a car loan, or a mortgage, while a bad credit score can have these same lenders turning up their nose – or their interest rates. So it's important to know how the financial choices you make today in response to the pandemic might impact your credit score in the coming months.
How Credit Scores Work
First, it’s important to understand that your credit score has nothing to do with the broader financial situation this pandemic has caused. Unlike stock market investments or the value of RRSPs, your credit score won’t go down based on market conditions – it’s all about your own individual actions when it comes to credit and debt. So here are five factors that influence your credit score:
- Payment history (35%). Are you making your payments on time or are you consistently late – or not paying at all?
- Credit utilization (30%). How much credit are you using in relation to your credit limits?
- Credit history (15%). How long have you been using credit, and are you in good standing?
- Credit mix (10%). Do you have diversity in your credit (i.e. credit card, line of credit, mortgage, auto loan, etc.) demonstrating good debt management skills?
- Credit inquiries (10%). Have you been seeking out new credit in order to get by?
If the COVID-19 crisis has directly impacted your finances, you might take actions that could impact three of the five items listed above, which would likely result in your credit score taking a hit.
Three Ways the Coronavirus Could Impact Your Credit Score
People living paycheque to paycheque, or those who simply don’t have any more paycheques coming in, may (understandably) react in ways that can impact their credit score. Here are three of the most common ways this could happen.
If you have no money coming in, or significantly less money coming in, you’re going to be hesitant to send it out. So, you may choose to stop paying some of your debts. This will of course impact your payment history. For example, your credit report will show that you’ve failed to make payments and, as a result, your credit score will likely drop.
If you can't keep up with your current payments, contact each of your creditors to see if you can work out a temporary payment arrangement. You can check out our free Letter to Your Creditors template that you can download, customize, and send to your creditors explaining how the pandemic has impacted your ability to keep up with bill payments.
Some lenders are allowing you to defer payments for up to six months. In this case, your credit score shouldn't be impacted because you’re not expected to make a payment. However, banks are handling this on a case-by-case basis, plus you may still accrue interest, which will increase your monthly payments when the deferral period ends. But the good news is at least your credit score should remain intact.
If you’re unable to reach an agreement with some creditors, try to at least make the minimum payment to avoid higher interest rates, late fees, and credit report dings.
It’s important to note that this is an unprecedented time in our history, and some hiccups are bound to occur when creditors relay information to credit bureaus. For more on this, check out this CBC News report.
Using More Credit
If you have available credit on your credit cards, and you’re feeling cash-strapped, you may be tempted to charge everything you can. In doing so, you not only rack up interest charges, but you also increase your credit utilization ratio. This usually sends up a red flag to creditors, who may interpret this as a sign that you are relying too heavily on credit to get by.
While it’s natural for some people to fall back on credit cards, especially during a crisis like the one we’re in now, if at all possible, try to put them aside. This is the time to instead rely on that emergency savings fund we’re always talking about, if you have one.
If you have other savings, such as for a vacation or a new device, it might be worth dipping into these savings now (yes, postponing your goals) rather than relying on credit. Remember, credit is debt that continues to grow, so try to avoid it if you can.
Trying to Obtain More Credit
During these trying times, you may attempt to obtain more credit, applying for new credit cards and other loans. While this is understandable, it does increase the number of credit inquiries on your credit report, which reduces your credit score.
Applying for new credit items, especially when you’ve maxed out your existing credit, sends up a red flag to creditors. They see this as a sign of financial trouble and trying to make ends meet by relying on credit. They’re also likely to turn you down, because if you’ve already maxed out your existing credit, chances are you won’t be able to keep up payments with any new credit.
Instead of taking out new credit to make ends meet, you might want to tap into your savings or even your investments to help maintain your credit score. You might also consider using balance transfer opportunities to free up an existing credit card (just beware of balance transfer pitfalls).
Credit Canada is Here for You
The coronavirus pandemic has taken a financial toll on many of us, and we understand that you may be unsure of what your next move should be. If you’re struggling financially, our caring Credit Counsellors are here for you. They can provide you with free advice on how to approach your creditors and how to take advantage of their relief offers in ways that won’t impact your credit score, or at least minimize the impact.
As always, our certified Credit Counsellors are also available for free financial advice and tips for managing your money and debt, such as using a Budget Planner + Expense Tracker. Contact us today to talk confidentially about your debt situation with an expert.