5 Strategies to Protect Your FICO Score During the Covid 19 Crisis
Originally posted on LinkedIn on March 22, 2020
While I hesitate to talk about something as trivial, when compared to recent events, as a FICO score, it is imperative that people develop strategies to protect themselves during the economic upheaval developing in the wave of the Covid 19 crisis.
What is a FICO score?
According to myFICO, “A FICO Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay, and how much it will cost.” So in practical terms, the higher the FICO score, the lower the interest rate a borrower will have to pay on any future credit facility. The lower the interest rate, the more money the borrower keeps for themselves.
The categories considered when calculating one’s FICO score are weighted as follows:
35% - Payment history
30% - Amount owed
15% - Length of credit history
10% - Credit mix
10% - New credit
This article will focus on the largest category, payment history.
Payment History
Your payment history is the timeliness of payments you have made on your credit balances in the past. According to myFICO, types of credit considered are: credit cards, retail accounts, auto loans, student loans, finance company loans, and mortgage loans. The credit agencies keep a record of all of the times you paid late, how late, and whether you paid at all. Paying amounts owed by the due date improves your FICO score, paying late will lower it.
5 Strategies for the Current Situation
What can consumers do to preserve their payment history during these uncertain economic times?
1) Call your lenders and landlords, and explain your situation.
If you anticipate that you are going to have problems meeting your financial obligations, inform your creditors immediately. There have been multiple reports that lenders are issuing moratoriums on payments and interest. If your creditor is offering a moratorium, it may be a good idea to take it. However, before doing so, confirm that it will not negatively impact your payment history. Once you know which ones are placed on hold and which ones are not, move on to step 2.
2) Prioritize your monthly payments.
Normally, I advise clients to pay off the balance charging the highest amount of interest in full every month, and then use the remaining available funds to pay down the rest. Unfortunately, these are not normal times. If you find yourself in a worse cash position than normal, it may make sense to a) take advantage of any available moratoriums offered in 1) above; and b) just pay the minimum amounts to preserve cash as this crisis develop. Yes, you will have to pay the usurious interest rate for a few months, but in times like these, a little cushion never hurts anyone. Your credit history will not be adversely affected if you only pay the minimum balance due, on time, for a month or two.
3) Place a freeze on your credit.
Scammers will inevitably use this crisis to take advantage of the unsuspecting and distracted consumers. Placing a freeze on your credit will prevent anyone from establishing credit in your name and ruining your payment history.
4) Never cosign for someone.
You may have some family members or friends, who have come upon hard times, ask you to cosign on loans for them. General rule of thumb, NEVER DO THIS! Being a co-signer will inextricably link your payment history to theirs, and could negatively impact your FICO score. Give them cash or help out in some other way, but NEVER cosign on credit for them.
5) Reach out to your state and federal representatives.
There is a bill in congress that is calling for the protection of workers’ credit during this economic disaster. Without wading into a partisan political morass, I would urge all Americans who are affected by this crisis, and even those who are not, to contact their elected officials and demand these types of protections. And if they choose to do nothing, choose a different candidate in the next election.
In summary, BE PROACTIVE and be your own advocate. These challenging economic times will eventually pass. Protecting your FICO score as much as possible will place you in a stronger economic position once they do.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.