Your FICO score has real potential to become vulnerable during an economic setback. That excellent credit score you spent years building could collapse to average, fair, or even poor, in a matter of months. It happens because the financial pressures during an economic setback are greater than they are in a more robust economy.
Protecting your FICO score during an economic setback can be an important sub-strategy in a weak economy. Sure, you’ll have your hands full keeping your job income intact and avoiding the worst effects on your investment portfolio. But when the smoke clears, and the economy begins to recover, having a healthy FICO score will be one of the building blocks of your own personal financial recovery.
There are several reasons why your FICO score becomes even more vulnerable during economic setbacks. But there are also multiple strategies to keep it from happening in the first place. You can make it happen, but you’ll need to be proactive.
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Why Protecting Your FICO Score During an Economic Setback is Important
Most may be aware of how important it is to protect your credit score during ordinary times. But there are several reasons why it’s even more important if you’re experiencing an economic setback.
Consider the following:
Loan payments may be delayed by unstable income. It may be easy enough to keep up an on-time debt payment schedule when life is humming along. But that pattern can easily be interrupted by either a decline in income or the loss of a job. The potential for credit impairment is even greater if the period of unemployment is prolonged.
Income shortfalls can cause greater reliance on credit. As the amount of credit outstanding rises, your credit utilization ratio increases as well. As the second most significant factor in determining credit scores, a rising credit utilization ratio can pull down your credit score.
Lenders may freeze credit lines or lower credit limits. In this way, your credit utilization ratio may rise even if you don’t increase the amount you owe. A decline in your credit limit by one or more creditors will automatically cause the ratio to rise, having a negative impact on your credit score.
During an economic downturn, financial crimes tend to increase. There’s evidence some types of crime, including identity theft, increase during a recession. It makes sense, because criminal activity tends to increase during times when more legitimate ways to make money disappear, and because consumers themselves are more vulnerable to theft and deception.
In a competitive job market, credit scores can become more important. If two job candidates have roughly equal qualifications for the same job, the position is more likely to be awarded to one with a higher credit score. It’s possible to have your job prospects reduced for years by a major credit event from an economic downturn, like a bankruptcy or foreclosure.
How to Protect Your FICO Score During an Economic Setback
There’s no single way to protect your FICO score during an economic setback. Instead, implement as many of the following as you can:
Monitor Your Credit Regularly
During a time of economic difficulty, it’s never a good idea to simply assume your credit is good, even if you’re not making extensive use of it. More than ever, you’ll need to regularly monitor your credit score to learn if there have been any significant negative changes in your credit profile. Or worse – if you may be the victim of identity theft.
There are multiple services you can use to monitor your credit, including some that are completely free. Others are premium programs that provide important protective services.
For example, a monitoring service like IdentityGuard not only tracks and reports your credit score on a regular basis, but it also protects your identity from thieves. As discussed earlier, identity theft is one of the major threats consumers face during an economic setback.
One of the most important benefits of monitoring your credit regularly is to put yourself in a position to act as soon as problems arise. It may not be possible to stop a credit problem in advance. But prompt action could minimize the damage and provide you with the time needed to rebuild your credit score after the fact.
Use myFICO to Monitor Your Credit
Another way that you can monitor your credit easily is to use a service like myFICO.
myFICO is a division of Fair Isaac, the company responsible for designing the FICO scores that many lenders use to judge people’s credit. The website gives consumers easy access to copies of their credit reports for a one-time cost.
You can also sign up for a subscription service that lets you receive regular credit reports from one or all three bureaus.
The subscription services give you additional information that you might find useful, like information about your FICO mortgage or FICO auto scores, which are special credit scores used specifically for those types of loans.
myFICO also comes with automatic alerts for potential identity theft and the option to set custom alerts, such as an alert when you reach your target credit score or could qualify for a lower rate on a loan, making it a good way for people to keep an eye on their credit without having to check their score manually.
Read More: A Review of myFICO
Implement a Budget System to Keep You on Top of Loan Payments
It’s easy to get sidetracked during an economic setback. Pressures on the job or concerns about job security can distract you from day-to-day activities. One of those activities is paying your bills on time. If you get sloppy in this area, you can miss a loan payment or two, causing your FICO score to take a hit.
If you’re finding it difficult in any way to concentrate on staying on top of your finances, a good budget tool can help. Not only will it help you to better organize your finances, but many have alert features that let you know when the bill is coming due ahead of time. Just in case you forget, the budget app will be there to remind you. Some will even send an alert if you miss a payment due date. If that happens, don’t stress over it. Even if a loan payment or a credit card bill is a few days late, just pay it as soon as possible.
Most lenders won’t report a late payment to the credit bureaus as long as it’s made within 15 or 30 days of the due date.
If, for example, a credit card payment is five days past due, make the payment immediately. The line will certainly be hit with a late fee. But at least the late payment won’t show up on your credit report and damage your credit score.
PocketSmith is a great budgeting tool with a calendar feature to help you keep track of when your bills are due. One of the stand-out features of PocketSmith is the ability to run “what-if” scenarios to see how scaling up or back on your budget could impact your finances. You can also project your future balances up to 30 years into the future. Right now, Dough Roller readers can get 50% off a premium monthly subscription for the first two months–learn more here.
Have a Plan in Place to Shore Up Your Emergency Fund
Consumers often emphasize paying off debt during a crisis. While that may be well-intentioned, it may not be the right priority.
If you have extra cash flow, and the choice is between adding the money to your emergency fund or paying down/paying off debt, go with your emergency fund.
While it’s true that paying off a loan or credit card balance will eliminate a payment, it may be more important to maintain a cash cushion, especially during an economic setback. That’s because you’ll be able to access your emergency fund at any time, avoiding the need to tap–and increase–your credit lines.
If you’re still in control of your cash flow, your budget should have a line item dedicated to your emergency fund. Since you’ll be taking money out for unexpected emergencies, it’ll be mission-critical to make sure replacement funds are refilling the account.
If you’re having difficulty dedicating part of your income toward your emergency fund, you can use a micro-savings app.
For example, Acorns connects to a spending account, then rounds-up your purchases to even dollar amounts. The purchase amount is paid, but the change is held in savings, then transferred to an investment account once it reaches $5. For example, if you make a purchase for $5.30, $.70 will be transferred into savings. It creates a completely passive way to accumulate savings, with no dedicated effort on your part.
Still another example is Stash. Much like Acorns, it enables you to build your savings using round-ups. You’ll also have an opportunity to move small, flat dollar amounts into your account on a regular basis.
Either account will invest your money for you, giving you an opportunity to continue building savings on automatic pilot.
Start a Side Hustle to Earn Extra Cash
Probably the biggest reason most people get into credit-related problems during an economic setback is income. It can be reduced, become sporadic, or even disappear completely.
The best way to remedy that problem is to develop one or more ways to make extra money. You can check out our guide, 75 Ways to Make Extra Money on the Side, to get some ideas. Examples include becoming a referee or umpire, tutoring, editing, running errands, hairstyling, photography, video production, freelance writer, in-home computer repair, and many more.
Think about what you like to do and what you’re good at. It can be a skill that you use on the job or one you do in your personal life. If you can find a way to monetize it, you’ll have an income-generating side hustle to supplement your regular paycheck.
But don’t wait until you become financially impaired to get started. You should begin right now, from where you are, while you don’t have the pressure of economic distress.
A good side hustle can accomplish two important goals during an economic setback:
- It can provide a much-needed second income that will allow you to make your bill payments on time, or
- Generate a cash flow, that when used in combination with your emergency fund and an unemployment check, can see you through a job loss.
And if the latest recession hasn’t visited your household yet, you can use the extra funds to both build up your emergency fund and pay down your debts. The combination of the two will keep you from falling behind on your debt payments and hurting your FICO score.
Take Advantage of a 0% Balance Transfer Credit Card
If you owe balances on multiple credit cards, it can complicate the job of making all your payments on time. It also means you’re paying a plethora of interest rates, with some of them likely charging 20% or more.
You can fix that problem by rolling several credit cards into one with a balance transfer. There are a number of credit cards with very attractive 0% introductory APR balance transfer offers.
Some cards offer a 0% APR on balance transfers for 15 months. If you’re able to transfer balances from four different credit cards, with an average interest rate of 20%, you’ll save hundreds of dollars in interest for well over a year. That will give you an opportunity to pay down your credit card balance quicker since 100% of your monthly payment will go toward the principal.
There’s also a major benefit to your FICO score, even apart from minimizing the likelihood of making a late payment.
The number of credit cards with open balances is a factor that affects your score. If you can reduce several cards with balances down to one, it’s likely your credit score will bump up. That will present you with a real opportunity to increase your credit score even during an economic setback.
Contact Your Creditors Immediately If You’re Experiencing a Financial Hardship
If the worst happens, and you lose your job and drain your savings, your ability to make your loan and credit card payments on time will be compromised. If that’s the case, take action immediately.
Contact your creditors and let each know what your situation is. They may be able work out some sort of limited forbearance, such as temporarily lowering your monthly payment or even allowing you to skip a payment. This will be easier to do if you go into the situation with an excellent payment history with your creditors and you can document your financial hardship.
Many lenders and credit card issuers have departments set up specifically to help customers in distress. This practice has become even more common with the recent coronavirus pandemic. Widespread unemployment is causing creditors to work more closely with borrowers to prevent short-term problems from turning into outright defaults.
If a creditor does extend forbearance, be sure to honor the terms completely. (This is where a side hustle and a well-stocked emergency fund can really help your cause.)
The hardship accommodation, whatever it is, may still have a negative impact on your FICO score. But it may be much less damaging than if you simply began missing payments.
Final Thoughts on How to Protect Your FICO Score During an Economic Setback
Economic setbacks can be general, like the current coronavirus pandemic, or personal, in the form of a job loss. Given the uncertainties of life, it’s important to always have a plan in place to deal with a financial setback, whatever the cause. A financial crisis can not only impair your short-term situation, but it can also leave lasting damage in the form of an impaired FICO score.
The best strategy is always advanced preparation. The usual advice always applies–make all your payments on time, pay down your debt levels, maintain the fewest open loan balances possible, and apply for credit only sparingly. All will help protect your FICO score.
If you are currently making your monthly payments on time and want to improve your credit score, try using Experian Boost. It’s free to use and can help improve your credit score by tracking all the monthly bills you are paying on time
But economic setbacks can magnify the problem. That’s where contingency planning enters the picture. Use whatever apps and tools needed to stay on top of your finances. Monitor your credit regularly. Keep your emergency fund well-stocked. If there’s an opportunity to create a money-making side hustle, make a real effort to make it happen. And if, despite your best efforts, it looks like you may fall behind on your loan payments, contact your creditors immediately to work out an arrangement.
Using each of those strategies will not only protect your FICO score, but they’ll also help preserve your finances during a difficult time.