Welcome to Credit Tip Tuesday #8. Covid-19 has been a challenge for us all. We all have either gone through it ourselves or known someone who has experienced sudden job losses and income fluctuations in the past year. The distressed economy caused by the Coronavirus pandemic have led many Canadians to worry about their financial future. To help offer some insights into the realities of the pandemic’s impact on your credit, here are 5 things you should know:
- How can the pandemic affect your credit?
- What to do if you are unable to pay your bills?
- What are deferred payments?
- How do deferred payments affect your credit?
- What actions can be taken to protect your credit?
How can the pandemic affect your credit?
The pandemic has meant job losses for many Canadian workers. This could mean that you are not able to make your credit card or other payments on time. You may have to delay payments or miss them for a few months. This has the potential to negatively affect your credit score. Remember, if you are sick & cannot work, your medical records are not reported to the Credit bureaus, however your late or no payment due to that, is reported.
A few ways you can help your credit is to keep making at least minimum payments, so that your credit file remains clean. This could mean higher interest in the balance carried forward, but it protects your credit in the short term. You can also think of transferring your credit balance to a lower interest card. In addition, you can ask for payment deferral. Many financial institutions have allowed for deferring mortgage payments during the pandemic for up to 6 months (or longer, if needed) without it affecting your credit.
What to do if you are unable to pay your bills?
If possible, pay the minimum, what you can, or the amount agreed to with your lenders and avoid late or missed payments. You should contact your lenders and creditors right away to see if any assistance is available.
Creditors also offer grace periods on purchases. This is a period of time during which, if you pay your balance in full by the due date, you are not charged interest on new credit card purchases. Check with your creditor to confirm your grace period.
What are deferred payments?
Deferred payments are a special payment arrangement on a debt. This could be reducing or delaying payment for up to 12 months or reducing the interest rate being charged on your debt. In response to the massive economic impact of COVID-19, many lenders and creditors have developed deferred payment programs for many types of debt, including mortgages, credit card debt, automobile loans, lines of credit, utilities, and property taxes among others.
Each has their own rules and arrangements available so you will need to check with each lender and creditor. You cannot simply miss a payment and assume things will be okay. You need to have an arrangement in place before you start delaying payments, otherwise you could jeopardize your credit score. In deciding whether to defer, consider interest rates, how much time you will need to recover and late payment fees, if any.
How do deferred payments affect your credit?
Ask your lender or creditor how the special payment arrangement will be reported to the national credit bureaus. They will ensure the specific elements which must be recorded to protect your credit standing are submitted correctly. When you look at your credit reports, you are assigned a rating to each account on how quickly you repay the extended credit. The rating is a combination of a letter and a number: the letter refers to the type of debt (“M” for mortgage or “R’ for revolving for example) and the number indicates how often you are late or miss payments. Prior to the pandemic, missing a payment on a credit card might be assigned a rating of “R2”. Today, if you have a special payment arrangement with your credit card issuer, the account would be paid “as agreed” and the R1 value will stay on the account as long as the arrangement is in place.
Most often, your mortgage is your biggest debt & largest monthly payment. You can speak to your mortgage lender and ask for a payment deferral. They may defer your payments for up to 3 months to start with. If you still have not recovered, then you can reach back out and ask for another extension. Make sure you are confirming with your lender before stopping your mortgage payments. Due to the unique situation with COVID-19, deferring your payments (as a result of the pandemic) will not negatively impact your credit score.
What other actions can be taken to protect your credit?
You may want to include a consumer statement to your credit reports. Free of charge, this 100-word statement adds context such as “Be advised that the negative account on my credit report is related to the Coronavirus and I intend to make these up as soon as I can”.
Ensure your current credit reports are correct and accurately reflect any deferred agreements you have reached with your lenders and creditors (this can take up to 30 days to be reported). Checking your credit score and credit report monthly is a great way to make sure that all the details are accurate and up to date.
When you get a Plastk Secured Credit Card, you get your credit score for Free and you can get your monthly Credit report through our Plastk Sentinel program. Additionally, you can now do this easily right on the Plastk mobile app.
Keep on top of your credit information and give yourself the best chance of minimizing the negative effect of COVID on your Credit.
Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.