Understanding the Role of Disaster Codes in Protecting Your Credit Score
Natural disasters, pandemics, and other unforeseen events can create overwhelming financial challenges for individuals and families. In the face of these hardships, managing bills, loans, and credit card payments becomes even more difficult. Fortunately, disaster codes offer a way to protect your credit score from the negative effects of missed payments caused by these unexpected circumstances. Disaster codes were particularly crucial during the COVID-19 pandemic and continue to play a vital role for individuals living in disaster-prone regions.
In this article, we’ll explore what disaster codes are, how they work, and how you can ensure your credit is protected when facing tough financial times.
1. What Are Disaster Codes?
A disaster code is a special reporting tool used by lenders to inform credit bureaus that an account has been affected by a disaster or similar external hardship. These codes are applied to your credit account when you’re facing financial challenges due to events such as natural disasters (e.g., hurricanes, floods, or wildfires) or health crises (like the COVID-19 pandemic).
When a disaster code is applied, it signals to the credit bureaus—and, by extension, to credit scoring models—that your missed or late payments are the result of extraordinary circumstances rather than a reflection of poor financial management. This means your credit score may not be negatively impacted even if you miss payments or fall behind due to these external factors.
2. How Disaster Codes Work
Disaster codes are applied by your lender or loan servicer and reported to the major credit bureaus—Experian, Equifax, and TransUnion. Once applied, the disaster code flags your account as affected by an unusual event, such as a natural disaster or government-declared emergency.
The goal of these codes is to ensure that missed payments during this period are not counted against you in your credit score calculation, effectively preventing your score from dropping due to temporary hardship.
Here’s how disaster codes typically work:
- Lender Reporting: Your lender must apply the disaster code to your account. This requires proactive communication between you and your lender, as it’s not an automatic process.
- Credit Bureau Notification: Once the disaster code is applied, the credit bureaus are notified, and your account is flagged to indicate you are facing hardship caused by a disaster.
- Impact on Credit Scoring Models: Credit scoring models, such as VantageScore 3.0 and VantageScore 4.0, are designed to recognize disaster codes. When the code is present, missed payments during the hardship period will not lower your credit score.
3. Which Credit Scoring Models Consider Disaster Codes?
Not all credit scoring models treat disaster codes the same way. The VantageScore models, in particular, have built-in features to account for these codes. Specifically, VantageScore 3.0 and VantageScore 4.0 models ensure that missed payments during a disaster are not factored into your credit score calculation while the disaster code is in effect.
Here’s how different scoring models handle disaster codes:
- VantageScore 3.0 and 4.0: Both of these models include special algorithms that ignore missed payments associated with accounts marked by disaster codes. This means your score will not drop due to late or missed payments while the disaster code is active.
- FICO Models: Older FICO scoring models may not explicitly account for disaster codes, so the missed payments could still affect your score. However, newer versions of FICO are evolving to offer more flexibility in cases of hardship. It’s important to ask your lender which credit scoring model they use.
Tip: Since VantageScore models 3.0 and 4.0 are more consumer-friendly in this regard, it can be beneficial to request that lenders or servicers use VantageScore for credit reporting during periods of hardship.
4. How Lenders Use Disaster Codes to Report to Credit Bureaus
Lenders are responsible for reporting accurate and timely information to credit bureaus. During a natural disaster or other major hardship, they have the ability to apply a disaster code to accounts affected by the crisis. However, it is important to note that:
- Disaster codes are not automatically applied. You must typically contact your lender to inform them of your situation and request that they apply the disaster code.
- Lenders may vary in their policies. Some lenders are proactive about offering hardship programs and applying disaster codes, while others may require you to make a formal request.
Once the disaster code is applied, your lender will notify the credit bureaus. The bureaus will then flag your account accordingly, ensuring that missed or late payments do not count against you during the hardship period.
Case Example: During the COVID-19 pandemic, many mortgage lenders and credit card companies applied disaster codes to their customers’ accounts to protect their credit scores. For example, Citibank applied disaster codes for eligible borrowers affected by the pandemic, preventing their scores from dropping even if they missed payments.
5. Steps to Ensure Your Account Is Marked Appropriately During Disasters
If you are facing financial hardship due to a natural disaster, health crisis, or other emergency, it’s important to take proactive steps to ensure that your credit remains protected. Here’s what you need to do:
1. Contact Your Lender Early
As soon as you know you will be affected by a disaster, reach out to your lender. Explain your situation and request that they apply a disaster code to your account. Be sure to document your communication with your lender and confirm that the code has been applied.
2. Ask About Available Hardship Programs
In addition to applying disaster codes, many lenders offer hardship programs, such as forbearance or deferred payment plans. These programs can provide relief by pausing or reducing your payments temporarily.
3. Monitor Your Credit Reports
Once your lender applies the disaster code, it’s a good idea to monitor your credit report to ensure the code is reflected properly. You can check your credit reports for free at AnnualCreditReport.com. Look for any missed payments that may have been incorrectly reported.
4. Stay in Touch with Your Lender
Disaster codes are often temporary, and lenders may adjust the terms of your hardship relief over time. Stay in communication with your lender to ensure you understand the duration of the disaster code and what happens when it expires.
5. Request a Credit Report Update if Needed
If you find that missed payments were incorrectly reported despite having a disaster code applied, you have the right to dispute the error with the credit bureau. Provide documentation from your lender to support your claim.
Conclusion
Disaster codes are an essential tool in protecting your credit score during periods of financial hardship caused by natural disasters, pandemics, or other unforeseen crises. By understanding how these codes work, which credit models recognize them, and how to ensure they’re applied correctly, you can prevent unnecessary damage to your credit score.
In times of financial difficulty, staying informed and proactive is key. Contact your lender, request disaster code application, and monitor your credit report to safeguard your financial health and recover more quickly once the crisis has passed.
