How COVID-19 may affect your credit

Written by: Tim Devaney
• Updated •4 min read
Man at home wondering if the coronavirus will affect his creditImage: Man at home wondering if the coronavirus will affect his credit

In a Nutshell

If you’ve participated in a lender’s COVID-19 relief efforts or otherwise had your finances affected by the pandemic, it’s possible that this could affect your credit. But the effects vary, so read up on the specifics to find out more.
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If COVID-19 has affected your finances, your lenders might be willing to help. But these efforts and other financial activity related to the pandemic might have an effect on your credit.

We’ve collected a few tips and info on what to monitor, so you can try to set yourself up for long-term credit stability during a difficult time.

How will COVID-19 relief measures affect my credit?

Lenders typically report negative account activity, like a late or missed payment, to the credit bureaus — that is, unless the lender has specifically agreed to allow that negative activity. So if you were approved for a hardship plan, had an account put in forbearance, or had payments deferred as part of your issuer’s COVID-19 relief efforts, you likely won’t need to worry about it having a major direct impact on your credit in the short term.

At the same time, there’s no guarantee that lenders won’t mistakenly report these planned late or missed payments to the bureaus. If that happens, we recommend contacting the lender first for an explanation and later disputing the activity, if necessary.

Read more: What factors affect your credit scores?

What if I miss a payment?

Unfortunately, missing a payment can have a serious impact on your credit because payment history is one of the most important factors that goes into your credit scores. If your lender reports a missed payment to the credit bureaus, it could stick with you for up to seven years.

The good news is lenders typically don’t report missed payments until the end of your missed billing cycle, or about 30 days late. If it’s been less than a month since you missed your payment, you might be able to avoid this scenario by paying immediately.

What if I can only make the minimum payment?

If you can’t afford to make your full payment on time but can handle the minimum payment, that’s better than not making any payments at all. At the very least, it will ensure that a late or missed payment doesn’t show up on your credit reports.

But making just the minimum payment, instead of paying your entire balance, could affect your credit utilization ratio, or the amount of your available credit you use. A lower number is better — the recommended target is typically 30%. If your balance stays high, your credit utilization ratio might, too. This ratio is one of the most important factors in determining your credit scores.

What if my account is placed in forbearance or payments are deferred?

If you’re struggling to make even a minimum payment, you might want to ask your lender about deferring payments or placing your account in forbearance.

Both of these plans may allow you to skip a few payments for short-term relief. The lender might report that a payment has been deferred or your account is in forbearance, and that could affect whether other lenders decide to work with you the next time you apply for a financial product. But your lender won’t report a late payment, so it shouldn’t hurt your credit scores in the short term.

What if I enter a hardship program?

If you can only afford to make a small payment, your lender might offer participation in a hardship program.

These programs can vary from lender to lender, but they often take the form of a repayment plan that makes it easier to pay your monthly bill. You might be able to negotiate a lower minimum payment, lower interest rate, lower fees and penalties, or a fixed payment schedule.

A hardship plan won’t impact your credit scores on its own, but there could be other consequences.

In some cases, your lender might choose to close or limit your account because you’re participating in a hardship program. If that happens, it could hurt your credit utilization ratio, length of credit history or credit mix — all of which factor into your credit scores.

But the long-term effects of an account you can’t manage could be more harmful to your credit overall. If a hardship program helps you maintain a steady payment schedule, it might be worth it.

Next steps

If you’re worried that an inability to pay your bills right now will hurt your credit scores, don’t be afraid to ask your lenders for help. Be upfront and let them know you’re struggling instead of waiting until after you miss a payment. Lenders have said they’re open to helping people during the COVID-19 epidemic, so your requests won’t come as a surprise.

If you try to negotiate with your lender, be prepared to pay what you can afford. Temporary relief is just that, and your debt likely won’t be canceled entirely.

It’s also important to regularly check your credit reports to make sure your hardship, deferment or forbearance is being reported accurately — and not as a late payment. If you notice any discrepancies, we recommend contacting your issuer first and potentially disputing the errors with the credit bureaus.

About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.