How to Protect Your Credit Score During Economic Crises: Lessons from the Pandemic
The COVID-19 pandemic sent shockwaves through the global economy, leaving millions of people facing unexpected financial hardships. In the U.S., job losses hit historic highs, and many families struggled to pay their bills. One of the major concerns for individuals during this time was how to protect their credit score—a key factor that influences the ability to secure loans, rent homes, and access financial services.
While the pandemic may have been unprecedented, the financial lessons learned can help individuals better prepare for future economic crises, whether due to recessions, natural disasters, or personal financial struggles. In this article, we will explore proactive steps to protect your credit score during times of financial uncertainty, drawing on valuable insights from the COVID-19 experience.
1. Communicating with Lenders Before Missing Payments
One of the most important lessons from the pandemic is the power of early communication with lenders. When faced with financial difficulty, many individuals’ first instinct is to ignore the problem, hoping things will get better soon. However, silence can lead to missed payments, which quickly harm your credit score.
Why Communication Matters
Lenders understand that economic crises impact everyone, and most have hardship programs in place to help borrowers. The sooner you reach out to your lender, the more options you have to manage your payments and avoid being reported as delinquent to the credit bureaus. Many lenders are willing to offer temporary relief in the form of forbearance or deferred payment plans, which allow you to postpone or reduce payments without damaging your credit score.
Example: During the COVID-19 pandemic, banks like Chase and Wells Fargo introduced programs allowing customers to pause mortgage and credit card payments. These programs were not automatically activated, so it was crucial for borrowers to contact their lenders early and ask about available options.
Steps to Take:
- Reach out early: Contact your lender as soon as you foresee financial trouble. Don’t wait until you’ve missed a payment.
- Be transparent: Explain your situation clearly, whether it’s due to job loss, reduced hours, or other crises.
- Ask about relief options: Inquire specifically about hardship programs that can protect your credit score, including forbearance or deferred payments.
2. Relief Options to Avoid Negative Credit Reporting
Protecting your credit score during an economic crisis involves knowing your relief options and how they impact your credit report. Three primary tools were frequently used during the COVID-19 pandemic: forbearance, deferred payment plans, and disaster codes.
Forbearance
Forbearance temporarily suspends or reduces your loan payments without marking your account as delinquent. During forbearance, interest may still accrue on the loan, but your payments are paused for a set period.
- Pros: You avoid missing payments, which prevents your credit score from dropping.
- Cons: Interest may continue to build, increasing the total amount you owe.
For example, mortgage holders who entered forbearance programs during the pandemic were able to skip several months of payments without a hit to their credit, but they had to resume payments or extend their loan term afterward.
Deferred Payment Plans
Deferred payment plans allow you to postpone payments and move them to a later date, often at the end of your loan term. Unlike forbearance, some deferred payment plans may not accrue interest during the deferred period.
- Pros: Payment obligations are pushed into the future, giving you time to stabilize financially. Credit scores are not negatively affected if the terms are met.
- Cons: You remain in debt longer, as deferred payments are added to the end of the loan term.
Tip: Always clarify with your lender how payments will be handled at the end of the forbearance or deferment period. Understanding the long-term implications can prevent financial surprises later on.
Disaster Codes
Disaster codes are special codes that lenders use to report to credit bureaus that a borrower’s missed payments are due to extraordinary circumstances, such as a natural disaster or pandemic. These codes ensure that your missed payments do not negatively impact your credit score while the disaster code is in effect.
- VantageScore models 3.0 and 4.0 automatically disregard missed payments when a disaster code is applied, ensuring that your score remains stable even during a financial crisis.
3. Lessons Learned from the COVID-19 Pandemic
The COVID-19 pandemic highlighted several key strategies for protecting credit scores during a crisis. While the specific challenges of future crises may vary, these lessons offer a solid foundation for managing financial uncertainty:
A. Be Proactive, Not Reactive
Waiting until you’ve missed payments can severely damage your credit score, which may take years to rebuild. Instead, take action early by communicating with lenders and exploring relief options before financial trouble escalates. The sooner you take control, the more options you have.
B. Monitor Your Credit Regularly
During the pandemic, many borrowers assumed that their accounts were protected, only to later discover that missed payments had been reported to the credit bureaus due to errors or miscommunication. Regularly monitoring your credit report ensures that any mistakes are caught and corrected before they cause long-term damage.
Tip: You are entitled to a free credit report annually from each of the three major credit bureaus (Experian, Equifax, and TransUnion). During crises like COVID-19, the credit bureaus offered free weekly credit reports, which made it easier for consumers to stay informed.
C. Plan for Future Financial Uncertainty
The pandemic taught us the importance of building financial resilience. While it’s impossible to predict every crisis, having an emergency fund and reducing debt during stable periods can make it easier to weather future financial storms. Aim to set aside at least three to six months of living expenses in an easily accessible savings account.
D. Understand Credit Scoring Models
Not all credit scoring models treat missed payments the same way. During COVID-19, VantageScore 3.0 and 4.0 took into account disaster codes, but some older FICO models did not. Understanding which credit model is being used by lenders or landlords can help you better protect your score during a crisis.
Conclusion
Economic crises like the COVID-19 pandemic reveal how fragile personal finances can be, but they also offer valuable lessons in protecting your credit score. By communicating early with lenders, exploring relief options like forbearance or deferred payments, and understanding how disaster codes can safeguard your credit, you can prevent long-term damage during difficult times.
As the world faces future economic uncertainties, taking proactive steps and applying the lessons learned from the pandemic can help you emerge with your credit score—and financial health—intact. Stay informed, stay prepared, and remember that early action is the key to navigating financial hardship successfully.
