As the U.S. economy skids and many Americans scramble to make ends meet during the coronavirus pandemic, one casualty may be credit scores. Some congressional lawmakers want to prevent that.
A Senate bill introduced last week would prevent negative information from reaching your credit report for at least four months, as the nation continues battling the economic fallout caused from the spread of the new coronavirus, or COVID-19. There are similar proposals to protect credit scores circulating in the House, as well.
“During these uncertain economic times, Americans shouldn’t have to worry about their credit scores as they work to make ends meet,” said the Senate bill’s cosponsor, Sen. Sherrod Brown, D-Ohio, in a statement.
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While credit experts say such legislation faces an uphill battle — lenders rely on those scores to accurately assess how risky a consumer is — it’s worth knowing how the various moves you make to remain afloat could impact your credit score and, in turn, your access to loans or credit down the road.
“I’m sure lots of people are charging up their credit cards buying food and supplies,” said Al Bingham, a credit expert and author of “The Road to 850.”
“And in the next couple of weeks, we’ll see what lenders decide to do” to provide relief to borrowers who may fall behind on loan payments, Bingham said.
Late Sunday, U.S. regulators urged banks to work with their customers as economic conditions deteriorate and congressional lawmakers move to bring relief to struggling households. Some financial institutions already are offering various forms of assistance to consumers, including fee waivers for late payments or suspension of payments.
U.S. consumers are shouldering more than $14.1 trillion in debt, according to year-end 2019 data from the Federal Reserve Bank of New York. The amount is at least $1.3 trillion higher than the previous peak of nearly $12.7 trillion in the third quarter of 2008.
Bingham said if you do explore options with your bank to defer or lower payments, make sure you know exactly what you’re agreeing to and how it will affect your credit report and score. In the wake of the 2008 financial crisis, some lenders allowed consumers to skip mortgage payments.
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“Those missed payments were reported to the credit bureaus,” Bingham said. “Anything that changes your payment agreement — whether a forbearance or modification — they have a right to put it on your credit report.”
Generally speaking, a forbearance involves the lender agreeing to suspend or reduce payments for a set term. A loan modification is permanent (and forbearance may lead to it).
While a forbearance is typically reported to credit bureaus, it has a neutral effect on your score, said credit expert John Ulzheimer, president of the Ulzheimer Group in Atlanta. At the same time, though, other lenders or credit card companies would see the notation on your report, he said.
For credit cards, the general “rule” is that your score will start sliding more quickly when you are utilizing more than 30% of your available credit.