Protect Your Credit Score

With banks offering to allow mortgage deferrals up to six months and credit card issuers allowing cardholders to defer payments, consumers might be wondering if "skipping" their payments would have a dire effect on their credit scores. After all, under normal circumstances, missing payments is one of the worst things a consumer can do to their credit.

But what we're experiencing right now is anything but normal. Many Canadians are strapped for cash right now as businesses shut their doors and workers are being laid off. The need for cash flow is precisely why the government has introduced financial relief programs and financial institutions are allowing homeowners to defer their mortgage payments.

As helpful as these programs can be for your pocketbook, can they simultaneously be hurting your credit score?

How Can COVID-19 Affect My Credit Score?

The economic turmoil caused by the COVID-19 pandemic could have an impact on your credit score if there are changes to your financial activity. Your credit score could be impacted by the current health crisis if you're unable to pay your mortgage, bills, or credit card payments as a result of:

Job loss

Reduction in hours and income

Lack of savings (resilient fund) to fall back on

In any one of the above cases, you may want to alleviate some of the financial pressure, which is why mortgage and credit card deferral options may be available.

Get Help: Speak With Your Financial Institution

If your loss of in income will inevitably lead to missed bill payments, you may be better off looking into payment deferral options. As mentioned, mortgage and credit card payments are being deferred for those who qualify. But even though this may provide some temporary relief, how can this affect your credit score?

How Deferring Your Payments Can Still Affect Your Credit

While payment deferrals may provide temporary financial relief, it's important to know that your credit score could be impacted.

Credit bureaus like Equifax and TransUnion do not perform any extra analysis on the data received from lenders. In the eyes of a credit bureau system, a deferred mortgage payment or credit card payment is technically a late payment. This information is automatically generated, and lenders are still in the process of making changes to their systems to reflect deferred loan payment arrangements.

If you are thinking about deferring your payments, speak with your lender about how this could impact your credit score. Make sure they report your deferred payments to the credit bureaus in such a way to ensure your credit score doesn't get dinged.

Equifax and TransUnion are working to make sure that credit scores are treating fairly. But because the situation continues to evolve, steps still need to be taken to help minimize the negative effects on credit ratings without compromising the integrity of the data they receive and store.

In the meantime, you may want to gather documentation showing that you deferred payments as per an arrangement with your lender or creditor. You'll also want to show proof that you're income and job have been compromised as a result of the pandemic.

Try to get your lender to provide you with something in writing that says the payment is deferred, and not missed. You can also dispute any "missed" payment notes on your credit report if you can provide evidence that the payment was actually deferred and not missed.

Tips on Minimizing COVID-19 Impact on Your Credit Score

If you're in a financial predicament, there may be some things you can do today that can help minimize the negative effect on your credit score.

Pay the minimum amount on your credit card bill. While this is not usually advised under normal circumstances (paying in full or at least close to it is always best), at least you will be making a timely payment, no matter how small.

Check your credit report on a regular basis. You are entitled to a free copy of your credit report once every 12 months by contacting the credit bureaus. You can also use free credit scoring sites that will provide your credit score. You'll want to check your report regularly in order to make sure there are no errors.

If there are, they could be pulling your score down and should be disputed right away. Checking your credit report will also tell you what your credit score is right now. The next time you pull your report, you'll be able to identify any changes to your score.

Add a consumer statement to your credit report. You can add a "consumer statement" to your credit reports if you have an item that was disputed but wasn't removed or resolved. The statement should be no more than 400 words and include information proving your situation.

To have this statement added to your credit file, you'll need to contact the credit bureau in writing and provide copies of two pieces of ID, your full name and contact information, and your birth date.

FAQs About Your Credit Score and COVID-19

I’m having trouble paying my bills. What can I do?

The best thing you should do is contact your lenders and creditors right away. Inform them of your compromised income situation as a result of the COVID-19 pandemic and ask them what kind of special offers or programs they have to offer. If you choose a deferral program, make sure to ask them to take precautions when reporting your deferred payments to the credit bureaus, as discussed earlier.

My bank has granted me a 2-month mortgage deferral. How will this be reported to the credit bureaus?

As noted above, deferred payments could be reported as missed payments because data is reported and recorded automatically. That's why it's important to get your lender to see if arrangements can be made to ensure that your deferred payments are differentiated from a typical missed payment. Equifax and Transunion are also working hard to deal with the situation and help reduce any negative impact on credit scores. As the situation continues to change, more details should come out and be shared with consumers.

I’ve lost my job. Will this affect my credit score?

The loss of a job does not affect your credit score directly. However, your inability to make payments as a result of a lost job could impact your score.

Final Thoughts

These are certainly trying times for millions of Canadians. While people are trying to stay safe, their income may suffer at the same time. When money isn't coming in, it can be impossible to pay the bills. And while there are deferrals programs available, it's important for you to be up-to-date on how your credit score could be impacted. Be sure to speak with your lender if you're in need of payment deferral options, as well as to see if there's anything they can do to make sure your credit score doesn't plummet as a result.

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