Q: When my husband and I got together about 12 years ago we made a pact to get out of debt. And we did it. Then we saved up to buy a house and despite some hard times, we managed to keep our debt under pretty good control. But the pandemic has made it hard to keep up with our payments. We both had our income affected and now we argue about money constantly. We’re worried because we’ve made some of our payments late, and a few we couldn’t make at all. Deferrals have helped, but what happens after the pandemic when our credit reports show that we had some problems? ~Brianne
A: Let me start by congratulating you and your husband for getting out of debt. It’s always so much harder to pay off debt than it is to incur it, so please, give each other a pat on the back for all your hard work. The process you went through to get on track financially before making one of the biggest purchases of your lives will have also helped you gain financial knowledge and money skills. It’s these personal finance skills that will help you move forward during this uncertain time.
When it comes to credit reporting there are a lot of unknowns, but there are a few things to keep in mind when it comes to late payments on credit obligations.
During the pandemic when payment deferrals are in place for you, creditors will not be reporting late, missed, or partial payments to the credit bureaus. That will end when the deferral period ends but for any alternate arrangements that you had in place, there should be no need to worry.
To check if you have reason to worry, everyone can get a copy of their own credit report from each of the credit reporting agencies. I would encourage you to do that. This allows you to verify that the information is accurate and correct any details that might be wrong. Here is the information you need to obtain your own credit reports for free .
With few exceptions, information stops being reported on your credit report once that information is six to seven years old. For instance, if you had a few months in a row of late credit card payments, one by one those derogatory notations will disappear as six or seven years lapse (the exact reporting time depends on the province in which you reside). It is important to understand that if details on your credit history report are accurate, they will not be removed or changed, but that’s not to say that your credit will be beyond repair while those late payment notations are being reported. As time goes by and you resume regular, on-time payments, the late payments become less important and eventually drop off your credit report entirely.
A poor payment history can wreak havoc with your credit score
A credit score is used by lenders to evaluate how much risk they take on if they lend you money. Your score is drawn from specific factors based entirely on information in your credit file, but a credit score is not reported as part of a credit file. Your payment history plays a significant role because if you faltered with previous commitments, there’s a chance you’ll run into trouble making payments on any new credit you obtain.
Our credit scores change often and vary from one credit reporting agency to the next. It is also up to individual lenders to decide how they use credit scores. For example, a score of 760 might be considered excellent by one lender but another lender may consider a score of 782 to be excellent. The higher your score, the better but it’s not worth protecting at all costs. There are times when you’ve got a lot of challenges to deal with and letting your credit score and overall rating slip is just the way it is. However, once your difficulties pass or are dealt with, you can work to re-establish a positive credit rating again.
Add an explanation to your credit report
If you’ve had a major event disrupt your ability to repay your debts as agreed, you can make creditors aware of this by placing a consumer statement on your credit report. The statement, or explanation, will survive for six years and is just a short note that is released to anyone requesting your full credit report.
It can be worth following the instructions that come with your credit report to add a consumer statement to your file even if you don’t think you’ll be borrowing money any time soon. Mortgage renewals, rental applications, background checks for employment, or when you purchase insurance are all times when you might be asked to consent to a credit check. If there’s a reason for the derogatory information to be there, explaining what caused it can be worthwhile and provide a fuller picture of the situation before someone jumps to conclusions about what may or may not have happened.
Resist the urge to pay for credit repair
It takes time and effort to rebuild a credit rating; there is no quick, easy “fix,” especially if your credit rating is extremely poor. There are companies that charge fees and claim that they can fix your credit for you – but buyer beware. There is nothing they can do that you can’t do yourself for free.
One of the most important things you can do while you’re trying to restore your credit rating is to establish a savings account and contribute to it regularly. While it might seem counter-productive to set savings aside while you need to maximize debt payments, if you don’t have savings to fall back on when faced with an emergency, you’ll have no means to pay for what you need to pay for. Savings really is the secret weapon against debt .
Credit beyond the pandemic
There is every chance that credit will look a little different once we are no longer facing a pandemic. Many individuals and families have pressed the reset button on their spending. After the lockdown they realized how much they have and how little they really need. Coming to this realization can make purging easier, but not buying the extra in the first place makes not just sorting your closets and cupboards that much easier; smaller credit card bills are easier to deal with too.
Creditors are re-evaluating their lending policies due to the anticipated losses they are likely facing. This could make it a little harder to obtain credit, with the best interest rates and most favourable terms and conditions reserved for the best clients. And while negative information will eventually be removed from your credit report, lenders are able to maintain records much longer. For instance, if you were unable to repay a significant debt to one particular creditor, they may no longer wish to have your business. For this reason it is important to do what you can to live within your means and avoid getting deeper into debt before you work to get back on track with your finances as soon as you are able to.
The bottom line on late payments and your credit score
Living through a pandemic is hard enough. Being worried about your credit, facing income uncertainty, and arguing with your spouse about money is more stress than you need. Try instead to draw on what has worked in the past to get yourselves through the tough times. Check online resources and blogs about personal finances and money management to refresh your memory or get new ideas. Capitalize on each other’s strengths; if one of you can crunch the numbers for a better budget while the other is the savvy shopper, divide and conquer. Maybe you’ve got the ability to gain some non-traditional income or become seriously frugal like in the early days of tackling your debts. Rather than keeping score against your spouse for who is winning or losing with your finances, stick with only friendly competition so that both of your scores come out ahead.
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check nomoredebts.org or call 1-888-527-8999.
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