How to Manage Your Credit During Financial Hardship

It can be a chore to stay on top of all things credit-related during normal times. But it’s particularly critical that you know how to manage your credit during financial hardship. If you lose your job or a portion of your income, it’s important to take measures to protect your credit — the sooner the better. That means before you fall behind on your payments and before the creditors start calling. 

You’ll have more options if you get in front of the problem. But even if you’re a little late to take action, there are things you can and should do. Here are the steps you need to take to emerge with the least possible damage. 

How to Manage Credit During a Crisis

Start by assessing your financial situation and budget. Determine how much money you have available, which bills are coming due or past due, and where you can cut spending. You’ll want to prioritize your housing, car, if needed, and food.

During a time of financial stress, you’ll need to make choices. Get your account numbers and payment information ready and call your creditors and loan companies, including your utility and phone company. It’s not uncommon for creditors to be overwhelmed with requests for assistance during tough economic times. Be patient if you encounter delays. 

Many have accommodations available for borrowers who are unable to pay due to financial hardship. Whatever you do, don’t ignore the situation. Once you are in serious default, they may not be able to help. 

Make detailed notes about payment arrangements, including who you spoke to, the agreed-upon amount and the due date. Specifically, ask about the effect on your credit score. If you defer payments, make sure you understand how your payment terms change once you’re able to resume payments. You don’t want to be caught off guard with exorbitant payments you still cannot afford.

You may want to add a consumer statement to your credit reports. In most states, a consumer statement is a 100-word statement you attach to each of the three credit reports that provides context or explains the circumstances of your financial difficulty. Although the statement doesn’t affect your credit score, lenders may take this into account when deciding whether to extend credit to you in the future. 

Keep your commitments to creditors. This is the best way to ensure that your financial difficulties have minimal impact on your credit score. 

Available Resources

If you need help managing your finances and cannot afford to pay, contact the National Foundation for Credit Counseling at 800-388-2227 or the Financial Counseling Association of America at 866-694-7253. They can refer you to an agency in your community. They may also be able to provide help with housing, food, legal aid and other emergency needs. Or contact CareConnectUSA.org. They have links to dozens of helplines, including many nonprofit organizations.

Common Mistakes to Avoid

It may seem tempting to throw in the towel when you’re already having financial difficulty. Don’t do it. There is a path forward to financial literacy. You just need to keep up the good financial habits and stay on track. Here are some common mistakes that make it difficult, if not impossible, to recover. It’s good to recognize them so you can avoid going down the same path. 

Living on Borrowed Money

You can’t solve debt with more debt. It never works. Better to significantly trim your budget, sell assets or find a side gig. If you absolutely must borrow money, do it to consolidate existing debt at a lower interest rate. Then pay it off as quickly as possible.

Taking Out a HELOC

A home equity line of credit deserves a special mention. It’s debt, but unlike your credit card bills, you’ve just secured your debt with the asset you’re seeking to protect (your home).

Failing to Stick to a Budget

Find ways to curtail your spending but make sure that your budget is realistic so you will stick with it. Pay with cash and only purchase things you can afford this month. 

Closing Your Credit Card Accounts 

Stop using your credit cards and you’re almost guaranteed to stop impulse shopping. Pay them off, but don’t close the accounts. Your credit score is based on having available credit that you don’t use.

No Plan to Rebuild Your Credit

Your credit score and credit reports are important tools for your financial well-being. Check your credit reports frequently to ensure that they are accurate and there are no signs of fraudulent activity. You are entitled to a free credit report once a year. But you should check all three bureau reports more frequently. 

Keep Your Credit on Track

A temporary financial setback shouldn’t prevent you from securing the financial future you deserve. Your credit score is one of the most important criteria that banks and lenders use to determine your creditworthiness when you apply for a credit card, loan or mortgage. Your credit score impacts the terms and the interest rate you’re offered and can make a difference of hundreds of dollars each month.

SmartCredit® can help you achieve your best possible credit score with strategies that are actionable and measurable. With SmartCredit®, you’re in control. Let SmartCredit® launch you on the path toward financial success. 

References:

Money Management International – How To Add a Statement to Your Credit Report