If your income has been cut due to COVID-19, maintaining a healthy credit score might be the last thing on your mind. But factoring your financial reputation into your crisis money management could be invaluable in the future.
Your credit history – a record of your debts, repaid loans and other financial moves – is used to develop a credit rating which informs lenders about your reliability as a borrower. If you’re in a tight spot and missing bills or credit card repayments, your credit rating could be taking a hit too.
There are a few ways to mitigate this damage and keep your credit history stable, or even improve it if you’re in the right financial situation.
1. Check your credit report and amend errors
It might be time to get to know your credit report. You can access it for free every 12 months via credit reporting bodies to ensure all the data is up to date and there aren’t any glaring errors hindering your score. If you do spot something fishy, like paid bills listed as debts or loan applications you don’t recognise, start by contacting the reporting body to investigate the problem.
It could also be useful to explain pandemic-related credit issues by adding a consumer statement to your report. This is generally 100 words outlining the circumstances of credit-related disputes. Addressing COVID-19 as the primary cause of financial hardship could position you as an historically responsible borrower who has unfortunately been impacted by unprecedented events. This may be more appealing to future lenders who might otherwise just see black marks on your report.
2. If you defer repayments, it won’t affect your credit right now
Pressing pause on loan or credit card repayment schedules could keep you afloat while you can’t meet these financial obligations. And while there are long term costs to consider in this process (especially in the case of larger sums like a mortgage), borrowers are getting a break when it comes to their credit history.
The Australian Banking Association (ABA) announced that during COVID-19, deferrals granted on home loans and other lines of credit won’t be reported as missed payments by banks, and thus credit ratings won’t be affected. To achieve this clean slate, customers will need to have met their repayment schedule prior to the virus outbreak in Australia.
3. Pay what you can
Information about your utility, phone and internet bills doesn’t normally reach your credit report, but if late payments rack up and are passed onto a debt collector, this could tarnish your rating. If your income has been reduced, focus on paying these necessities first. Read up on how to save on household expenses so this is more manageable. The same goes for any loan or credit card repayments: get in touch with your lender and see if you can negotiate on your repayment schedule and keep chipping away at it rather than defaulting.
RELATED ARTICLE: How to use your credit card effectively during COVID-19.
4. Take out a line of credit if you never have before
Shrewd savers who’ve never taken out a loan or credit card might be surprised to learn these moves don’t necessarily improve credit scores. Lenders want proof of your ability to pay off loans efficiently, and you can’t fully demonstrate that without dipping your toe in credit waters.
If you’re in a financial position to meet credit card repayments before hefty interest periods kick in, getting your first plastic could give you the rating boost you’re after. However, if your situation changes, you’re suddenly plunged into repayment panic and have to press pause, accruing interest could sting you at the end of a deferral period.
5. Don’t go wild on credit applications
It’s never a good idea to start applying for lines of credit willy nilly. Each time you do, what’s known as a ‘hard enquiry’ is recorded in your report, where lenders request access to check out your credit history. If you pile up too many of these in a short period, you’ll look overly eager for a source of credit, which will bring up questions about your financial stability.
6. Stay put if you can
Lenders like loyalty. Beyond how you manage your finances, your employment and living situation can also be interpreted as a reflection on how dependable you might be as a borrower. If you are able to, stick it out in your rental rather than bouncing around suburbs. If you’re currently employed, see where you can take your role in the immediate future instead of jumping between gigs.
Compare low interest credit cards if you’re new to credit products and looking to give your credit rating a boost.