Finances can get turned upside down when external factors put unexpected stress on a household. As a Certified Credit Repair Specialist and a twenty year veteran of the lending industry, I get a lot of questions about credit and what to do to manage it in good (and bad) times. As the coronavirus has spread, not only to people but to the economy, the questions have become more frequent and candidly a bit more desperate. The good news is that there are steps that you can take to respond to the financial crisis that can keep you sane and potentially minimize the impact.
Food, shelter and safety come first during a financial crisis
Your financial health is important, but your physical health and safety are more important. A credit score can be fixed, but anything that sacrifices your safety you may not be able to recover from. Timing also matters. It may take months to be foreclosed on, but with no heat your safety is at stake. Never subordinate your immediate needs to those of longer-term needs.
Look at your options before you pay (or don’t pay) anything
Under any circumstances there are often options to help consumers work through a financial crisis. Policies like mortgage loan payment forbearance, which you are now seeing offered on a wide scale, have always existed. Additionally, you can often seek payment plans for things like medical or IRS debt which will allow you to flatten out the obligations. Many student loans have options for deferment until after a financial crisis is over. Research is key and there is a lot of information on how to approach these challenges.
Communication is vitally important
Many times, all that you have to do is ask a creditor what you can do. If you have had a generally good history of on time payment, creditors can be very understanding and helpful. Partly because they sincerely want to help, and partly because it is often more expensive for them not to help and to try and collect. Many times, these options will come with added cost to you over the life of the debt and a heap of time up front, but this is an acceptable alternative to collections or other credit hits. Always make sure that you save all documentation if you enter into any alternative agreement or payment plan.
Budget and de-clutter to free up cash flow
Crisis and luxuries rarely mix. When cash is suddenly constrained, you must do everything that you can maximize your resources. Make a list of every expenditure that you have on a monthly basis and see if you can eliminate it. Gym memberships, online subscriptions, dining out and other unnecessary costs should be reviewed to determine if you can drop them. This is a great time to automate your budget and track it to ensure that you adhere to your new plan.
Triage your debt payment
When you have done everything that you can to reduce your monthly requirements and to maximize your cash flow, you need to decide what to pay first. To understand this, you need to understand how credit works. Credit scoring is somewhat predictable, and you can manage your payments to minimize the impact. Both the Fair Isaac (FICO) and Vantage scoring models use similar approaches to scoring you. In both models, timely payment of mortgage loans has the greatest impact followed by installment debt such as auto loans or student debt followed by revolving debt. The good news is that forbearance and deferment may free you up from the first two giving you free cash flow to service the third.
A financial crisis is out of your control
To get through a crisis, you may need to carry a credit card balance where you have always paid them in full in the past. If you are used to managing your debt well, this is hard. It goes against everything that you stand for. This is especially difficult when you factor in the impact of carrying a balance on your credit score. In a worst case scenario, you may be late on a payment. If you have no choice, you have no choice. Accept what is and get through the crisis. When things stabilize, you can pay the balances down and your score should rebound quickly.
Even the most financially responsible can come across hard times. This is especially true right now as the coronavirus sweeps across the world. Whether you have lost employment or seen reduced hours, been unable to work due to illness, or have been otherwise impacted you many have to make difficult decisions. Your first step is always to contact your creditor to try to work out payment arrangements. If you choose what gets paid and what doesn’t, your health and that of your family is first and foremost.