COVID + Credit: Keeping Up with Credit Card Debt During a Financial Crisis
Reading time: 5 minutes
Many people have relied on their credit cards throughout the Coronavirus/Covid-19 pandemic to help cover mounting bills and other essentials. In times of financial crisis, credit cards can be a vital financial resource. However, spending more than you can reasonably pay back and leaving debt unchecked can hurt your credit history and create bigger financial problems down the line.
If you've been using credit cards more than normal during the Covid-19 pandemic and growing your balances, be sure to also follow these strategies for good financial behavior:
- To keep your account in good standing, always make the minimum monthly payment
A minimum payment is the lowest amount you can pay your credit card issuer in order to keep your account in good standing. You can always pay more than the minimum, and it's preferable to pay your balance in full, but the minimum is the amount you must pay before your account is considered to be overdue.
If you're unable to keep up with your minimum payments, the creditor will mark your payments late, which will show up as a negative mark on your credit reports. Late payments can significantly drag down your credit scores and may stay on your credit history for up to seven years.
- Try to pay more than the minimum to reduce your balance
Ideally, you should pay more than the minimum each month (and pay the full statement balance if possible). When you only pay the minimum, you end up carrying debt from month to month, and your debt increases even further as you accumulate interest charges.
However, if it is not possible to pay more than the minimum right now, it is okay to pay just the minimum and catch up with your additional debt later.
- Avoid canceling your credit cards, even if you're not using them
If you're trying to avoid the temptation to spend money you don't have, it may seem logical to cancel your credit cards entirely. But by keeping your accounts open and not running up any more charges, you can improve your credit scores.
This is because of something called your credit utilization rate (or debt-to-credit ratio), which compares the amount of credit you are using to your total available credit. It is better to have a lower credit utilization rate. By keeping your credit card accounts open but not adding to your balance, you have a higher available credit and a lower debt-to-credit ratio.
For example, if you have $10,000 of available credit, but you only owe $3,000 across all accounts, you would be using just 30% of your available credit. But let's say you cancel one of your credit cards and your available credit drops to $5,000. Suddenly, you're using 60% of your available credit, which means you have a much higher debt-to-credit ratio and you look like a much greater risk to lenders.
- Take advantage of credit card rewards programs
Depending on the type of credit card account you have, you may be able to accumulate reward points. Types of rewards include gift cards, discounts on food delivery and deals on household items. If you're already using your credit card to pay for essentials, it's worth checking to see what sorts of rewards your credit card issuer offers. You may be able to get something back for the purchases you're already making.
- Watch out for debt relief scams
There are many companies that will try to take advantage of people in desperate financial situations. They may promise a "quick fix" to improve your credit scores, or create a new credit identity for you to "start fresh" with your credit history. Often these companies will fail to deliver and, in some cases, they may actually break the law. Here are some warning signs to watch out for:
- A company asks you to pay for their services up front According to the Federal Trade Commission, no legitimate credit counseling service should ask for payment before they deliver on their promised services.
- A company guarantees they can improve your credit scores There is no "quick fix" to improve your credit scores. It is usually a long process that requires you to create a payment plan, budget carefully, and make payments on time over an extended period. No company should ever guarantee they can improve your credit scores.
- A company tells you to give false information on credit applications Some companies may try to provide you with a "new" Social Security number, possibly calling it a credit profile number or credit privacy number. Be aware that these numbers may have been stolen, implicating you in identity theft.
However, it is illegal to obtain an EIN under false pretenses.
You can learn more about credit card scams here. There are plenty of reputable credit counselors that will work with you to develop a budget and payment plan. You can find a list of government-approved credit counseling agencies here.
Credit Card Debt Relief options
Due to the increased financial stress many consumers are experiencing during the Covid-19 pandemic, many credit card companies are offering relief options. To opt into one of these programs, you will have to contact your issuer directly and ask for help. Some may require proof that your finances have been impacted by the pandemic, so be prepared to provide the necessary documentation.
The relief options available to you will vary, but many companies are offering to lower or defer monthly payments. This is known as a forbearance period; once the forbearance ends, you will have to make up skipped or reduced payments. That might mean extending how long you make monthly payments or increasing your monthly payments until the past-due amount is paid in full. Keep in mind that a forbearance period won't lessen your debt, but it can be a good way to buy some time while you get back on your feet.
As an alternative to forbearance, credit card companies may offer to waive late fees or temporarily reduce your interest rates.
When entering into a modified payment plan with your credit card company, it's crucial that you understand what you're signing up for. Here are some clarifying questions to ask your servicer:
- If my monthly payments are temporarily deferred, will interest accrue during this period?
- How long will this relief last? Is an extension possible if my financial situation hasn't changed when the forbearance period expires?
- What information will be shared with the nationwide consumer reporting agencies?
- Will I still be able to use my card for purchases during this relief period?
Make sure to get any agreement you reach in writing and then check your statement monthly to ensure there are no errors.
You also should monitor your credit reports to confirm that your credit card payments are being reported accurately. For example, if your credit card issuer agrees to defer your payments, they could mistakenly report your payments as late. As long as you stick to your end of the deal you made, your payments should be reported as "current."
Typically, you're entitled to a free copy of your credit reports every 12 months and you can create a myEquifax account to receive six free Equifax credit reports a year. However, in response to the Covid-19 pandemic, all three nationwide credit bureaus — Equifax, Experian and TransUnion — are offering free weekly online credit reports via annualcreditreport.com through April 2021.
It is easy to become overwhelmed by credit card debt, especially during times of unusual financial stress. If you are able to make your minimum monthly payments during the Covid-19 pandemic, it can benefit you financially in the long run. But if you need a modified payment plan, make sure you call your credit card company. There's no shame in getting the help you need, and credit card servicers are more likely to accommodate your situation during this unprecedented time.