As the U.S is slowly making progress in returning to normal, the COVID-19 pandemic has been wreaking havoc with people’s finances and credit. Workers have been furloughed in record numbers and unemployment skyrocketed last summer.
Many have turned to credit cards or repayment arrangements with banks to make up for a shortfall in regular income. While that might seem like a solution in the short-term, it can have lasting effects on your credit score. Tap or click here to see why your score on Credit Karma seems higher than it should.
A good score can give you access to bank loans, credit cards with better interest rates or even more housing options. When it dips below a certain level or banks fail to report deferments, it can turn your world upside-down quickly. Let’s look at how the pandemic could be impacting your credit.
Here’s the backstory
In the U.S, most lending institutions make use of FICO or VantageScore to calculate your credit score. FICO is used by 90% of banks, while Equifax, Experian and TransUnion use VantageScore.
As the pandemic gained momentum, banks started to offer clients three-months of deferments on some payments. This sounds like a good deal. However, the U.S. Public Interest Research Group has noted that complaints to the Consumer Financial Protection Bureau (CFPB) have reached record levels.
Over 13,000 complaints have been filed in the past six months, a 550% increase from the 2,000 complaints in 2019.
The reason? Banks have either failed to record deferments or made several errors in dealing with client’s financial situations. The implication of a bank not making a note of your deferment means that it looks like you’ve missed a payment.
Why does it matter to you?
“Skipping” a payment will hurt your credit score. That means higher interest rates or being denied a credit extension. But a financial policy analyst at Consumer Reports says this has been a major problem, even before COVID.
“This is a problem that existed long before the pandemic. But it’s made more harmful and urgent because it limits access to affordable credit and financing to people who have been financially impacted by COVID-19,” explained Syed Ejaz.
Reporting errors isn’t the only culprit to your credit score taking a hit:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act has created a unique set of circumstances, and some institutions got things wrong. The Act stipulates that companies who provide mortgage and student loans need to provide deferred payments. The payments need to be reported as current, but several companies reported them as late.
- Disputing a claim is also taking much longer now. Before COVID, consumers had the right to expect a response to a dispute within 30 days. That would be enough time to mitigate any adverse effects on credit scores. In April last year, however, the CFPB removed that stipulation, effectively making the response time indefinite.
- The CFPB remains adamant that credit bureaus are responsible for investigations. But many complaints claim there have been issues with investigations relating to other matters.
What can you do about it?
There are several avenues available if your credit score has been affected by COVID-19:
- File a complaint with the Consumer Financial Protection Bureau.
- Credit bureaus don’t share information. So, prepare your dispute documentation and send it to the individual bureaus. You will also have a better chance of a response if you send it to them rather than your bank.
- Get as much evidence as you can. Account statements, payment records or receipts will strengthen your case.
- Record all correspondence and refrain from using generic contact forms on their websites. It’s wiser to send them a letter or an email to a direct recipient, as contact forms can be ignored.
- If you are going to send them a letter, do so by certified mail. This creates a paper trail that can be used as evidence in your dispute.