Keeping good credit during the pandemic may feel near impossible and especially for those out of work or anyone who is trying to regroup their personal finances at this time, but here are tips from two financial experts on keeping your personal finances in check.
Tips on keeping good credit
A FICO credit score ranges from 300 to 850, and the higher the score the more likely you will have a smoother experience with buying a car, qualifying for a mortgage or renting an apartment. The score tells a lender how financially reliable you are.
Your credit score is made up of your payment history and it measures your debt, how much you owe, how often you missed a payment, and sums up to how likely you are to pay your bills. Although your job, income, and marital status don’t affect your credit score, those out of work may be concerned.
While unemployment does not directly affect your credit score, as your employment status is not reported to credit bureaus, unemployment can indirectly affect your credit score through changes in your balances and changes in your repayment patterns, explained Paolina Medina, assistant professor of finance at Texas A&M University’s Mays Business School, in an email on Wednesday.
To improve or protect your credit score, Medina says it’s best to stay current on your loans and be aware of the percentage of your credit line you are using.
Minimizing the cost of your debt can reduce your monthly outflows and can help you comply with both conditions, Medina says. “Consolidate your loans to make sure you are paying the lowest possible interest rate. If you have a mortgage, take advantage of historically low interest rates and consider refinancing options,” she added.
Research has shown that monitoring your credit score can help you improve your financial behavior and ultimately improve your credit score itself, Medina explained. Subscribing to credit score monitoring companies that provide you with automatic updates periodically can be helpful, she said.
Keep lenders in the loop
If you are worried about meeting debt obligations the first thing one should do is contact the lender and advise them of the situation, says John Lopez, senior professor of practice and personal financial planning at the C. T. Bauer College of Business at the University of Houston.
“Lenders will work with borrowers to work out some modification to loans, extend or modify the payment terms, or offer some forbearance. The worst thing one can do is to ignore the issue,” Lopez said.
It’s beneficial to be proactive in contacting lenders and assure them this is a temporary situation and that once you are back on your feet you will be again complying with the original terms of the loan, he explained.
Focus on emergency funds
When hoping for the best but expecting the worse, Lopez says the number one thing one should have is an emergency savings fund that is equivalent to at least three months of non-discretionary living expenses (housing, utilities, food, transportation, etc.).
Worry can create desperate financial moves. While applying for another credit card or asking for a higher credit card limit might seem ideal, Lopez says this can be a dangerous path because it can mean additional debt during a time of insecurity. Instead, focus on ways to cut down expenses during the pandemic.
“One should look at the last three months of credit/debit card statements and checking accounts to see where money is being spent. Then identify areas where cuts can be made,” Lopez said in an email on Wednesday.
“Recognize that this will come to an end and in the meantime, make all the necessary adjustments to outflows that one can make. It may require cutting out the cable TV, cutting back on unlimited phone data plans, gym memberships, eating out, subscriptions (Netflix, Hulu, etc),” Lopez explained.
Budgeting during the pandemic
Medina has three helpful tips for budgeting during the pandemic.
- Use the power of mental accounting to your advantage. For example, use different credit cards for different types of expenses, or move money from your checking to your savings account.
- Treat your budget as a plan. For example, instead of allocating a certain amount for groceries over a month, plan how many times you will buy groceries on the month, and how much to spend every time.
- Keep track of your expenses. For example, use online apps that allow you to automate this process or set aside specific times each week to review your finances and to make adjustments.
Here’s more on how to make sound investment decisions during the pandemic.