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The coronavirus pandemic has left many in difficult financial situations. This can quickly lead to a drop in your credit score if you need to take on more debt or can't pay your bills on time.
If your credit has taken a hit recently, then it's important to work on rebuilding it right away. Credit score problems often get worse the longer you wait to fix them. They can also limit your options as you try to improve your finances going forward. For example, a lower credit score could prevent you from consolidating debt or paying off purchases over time with a zero-interest offer.
To help you fix your credit, let's look at how to diagnose the problem and what to do about it.
Find out why your credit score dropped
Before you can rebuild your credit, you need to know what's negatively affecting it. During the COVID-19 pandemic, there have been two common factors:
- You're delinquent on one or more payments: Your payment history is the most important factor used to calculate your credit score. If you haven't paid one or more bills for 30 days or longer, that can severely hurt your credit.
- Your credit utilization is too high: Your credit utilization ratio (how much you owe compared to how much credit you have) is the second-biggest part of your credit score. Ideally, you should use less than 20% of your total credit. If you've had to carry larger balances lately or a card issuer has cut your limit, your credit utilization could be higher than usual.
Unfortunately, these two issues often happen simultaneously. You don't have the money to pay your bills, so your credit card balance gets higher and higher. Then, you can't make a payment and your account becomes delinquent. This combination of factors can cause a major credit score drop.
If you're not 100% sure what's affecting your credit, a credit score tool can tell you. Several credit card companies offer this service to cardholders, but there are also several free credit score tools online.
Now, we'll look at what you can do to improve your credit in each of those situations.
You're delinquent on one or more payments
If you can, make minimum payments on delinquent accounts as soon as possible. These won't erase the impact to your credit, but they at least help you avoid any further damage. A payment that's late by 30 days isn't as bad as one that's late by 60 or 90 days.
Keep in mind that if you're less than 30 days late on a payment, you can still prevent it from hurting your credit. Creditors can only report late payments that are past due by at least 30 days. If you make a minimum payment that's 29 days late, you could incur a late fee, but your credit score will remain intact.
But what if you can't make minimum payments? Contact creditors and ask about their hardship plans. Many creditors have been providing extra assistance during the pandemic. You may be able to temporarily get lower monthly payments or put them on hold.
Another option is refinancing debt. With debt consolidation loans, you could get a lower interest rate and even a lower monthly payment. The same is often true with balance transfer credit cards. These options do, however, typically require that you have at least a fair to good credit score.
Your credit utilization is too high
First, check to see if any of your card issuers have reduced your credit limit. Some credit card companies have lowered cardholder credit limits during the pandemic. If that happened to you, then you'll have less total credit, which can cause your credit utilization to rise.
Some consumers in this position have been successful calling and asking card issuers to restore their original credit line. You should try doing the same if any of your credit limits were cut.
Of course, it isn't that simple if the balances on your credit cards have been steadily rising and you can't pay them down yet. In that case, there are a few ways to reduce your credit utilization:
- Make payments as soon as possible. Companies usually report balances after the statement closing date. If you pay your bill before this, there will be a lower balance to report.
- See if you can get a credit line increase from any of your card issuers.
- Open a new credit card. Its credit line will increase your total credit. A balance transfer card is the best option if you have the credit score to qualify.
- Get a personal loan and use it to pay down your credit cards.
Recovering your credit score
It may take time, but when it comes to your credit, there's no issue you can't fix. Whether you're dealing with delinquent payments, high credit utilization, or both, you'll see your credit score go back up if you begin working on it now.