What To Do If COVID-19 Is Affecting Your Credit Score
The financial toll of COVID-19 on the economy can’t be underestimated, and it’s affecting many people in a highly personal way. Job losses or reductions in working hours have forced many Americans to file for unemployment. With less income, the pandemic is causing many people to fall behind on bill payments. Although some lenders are offering financial assistance, when their forgiveness runs out, personal credit scores can quickly drop. If COVID-19 is affecting your credit score, here is some advice.
Understanding Your Credit Score
If you’re receiving calls and notices from debt collectors, it’s very important to obtain a copy of your credit report so that you can see what your overall credit score is and also review what information is being reported. Credit report mistakes happen frequently, and if you notice an error you should try to get it corrected. It’s also advisable to work with bill collectors before delinquent items are actually reported to the credit bureaus. There are several credit reporting agencies, such as Equifax and FICO, that collect information about personal financial history and payment habits and analyze this data to calculate a credit score. You can request a free credit report up to once every 12 months. FICO defines credit score categories as follows:
- 720-850 Excellent
- 690 to 720 Good
- 650-690 Problem
- 350-650 Poor
- 0-350 No Credit
Negative Impacts Of A Low Credit Score
Once you find out what your credit score is, you’ll be better equipped to make decisions about your financial future. Even if you have a very low credit score, ignoring debt is the worst possible choice. Any additional unpaid debt you accumulate will eventually show up and harm your credit rating even further. And, the longer the situation continues, the lower your credit rating will plummet. It’s also important to understand that negative credit events such as late payments, foreclosures and collection accounts can take up to seven years to be cleared from your credit report. A poor credit score can make it more difficult to borrow in the future, whether it’s a car loan, mortgage or credit card account. And, if you do happen to qualify for a loan with a lower credit score, you’ll likely have to pay higher interest rates to make up for your higher level of default risk.
Bankruptcy Can Be A Solution
To restore a poor credit rating, you’ll need to reduce your debt and ensure your bills are paid on time, but this may be all but impossible due to COVID-19. Depending on your situation, debt consolidation may be a strategy that’s worth exploring. But, for many individuals who are experiencing sustained financial hardship, bankruptcy may be the most prudent option. If you choose to declare bankruptcy, any negative credit issues will be resolved when you file. The bankruptcy itself may stay on your credit report for up to ten years, but during this time you will be able to start gradually rebuilding your credit.
How Bankruptcy Can Actually Help Your Credit Score
Approximately 30% of a person’s credit score is attributed to their debt-to-credit ratio. This important metric is basically the amount of money owed to creditors compared to the total amount of allowable credit. Filing for bankruptcy can actually improve your debt-to-credit ratio, which will in turn can increase your credit score. If your bills have gotten out of hand, you likely have high credit card balances that grow every month. This can drastically lower your credit score. Once you file for bankruptcy, those credit card accounts will be frozen or closed. If you obtain new credit card accounts after you file for bankruptcy or reaffirm current debts (a process by which you negotiate with the lender to repay some or all of the debt, but often at a lower interest rate) you may able to improve your debt-to-credit ratio which in turn will boost your credit score.
An Experienced Bankruptcy Attorney Can Help
The COVID-19 pandemic has created unprecedented job loss and financial hardship for many individuals and families. If your bills are piling up and you’re being hounded by creditors, filing for bankruptcy can provide you with financial relief and help rebuild your credit score. Sirody & Associates has extensive knowledge of Maryland bankruptcy law. We have been helping Marylanders get a fresh financial start for over 25 years. Our attorneys will meet with you in person, by video conference or over the phone to better understand your unique situation and provide you with the information you need to make the best decision to ease your financial burdens. Contact us online or call (410) 415-0445 today.