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COVID + Credit: Five Credit Mistakes to Avoid During the COVID-19 Pandemic

Reading time: 4 minutes

If you're one of the many Americans facing financial setbacks due to the Coronavirus/Covid-19 pandemic, your relationship with your credit accounts may have shifted. You may be using your credit cards more than normal, feeling stressed about making your monthly payments or worrying that an increased reliance on your cards will cause your credit scores to decline.

Be careful to avoid these five mistakes people may be making with their credit cards during the Covid-19 pandemic:

1. Failing to communicate with your lenders

In many cases, people who are struggling financially are afraid to reach out to their creditors and would rather figure out how to make ends meet on their own. However, many creditors are currently offering relief options during the pandemic. When given prior notice, some credit card companies may allow you to defer or decrease your monthly payments for a period of time. They might also waive late fees or temporarily decrease your interest rate.

However, your lenders can only offer you these accommodations if you contact them before you miss a payment. They're unable to accommodate financial hardship retroactively, so it's important to reach out in advance and ask what relief options may be available to you.

2. Only making the minimum monthly payment if you can afford more

Generally, it's a good idea to pay more than the minimum on your credit card debt so long as you're able to afford it. If you only pay the minimum, significantly more interest will accrue on your balance over time, increasing the duration of your loan and the amount of money you'll end up spending. So if you're financially stable, paying above the monthly minimum will help you get out of debt sooner and save money in the long run.

3. Canceling your credit cards when you're no longer using them

Canceling your credit cards may seem like a logical way to avoid temptation and prevent yourself from leaning too much on credit. However, two components of your credit history can be negatively affected by a sudden account closure.

First is your credit utilization rate (also known as your debt-to-credit ratio), which is the amount of debt you currently carry divided by the total amount of credit you have available. Lenders like to see a relatively low utilization rate (typically no more than 30 percent) because it suggests that you'll pay back the money you borrow rather than max out your cards and rack up debt indefinitely. The total credit available to you is calculated across all of your credit cards and other revolving credit accounts. Therefore, closing a card suddenly could dramatically increase this ratio and have a negative impact on your credit scores.

Second, your credit scores also weigh the length of your credit history. If you have a long-held account that you close suddenly, even one you rarely use, you could significantly shorten the length of your credit history and impact your credit scores.

So long as you won't be tempted to make additional charges to cards you're trying not to use, it's generally better to leave the accounts open. If you don't want to be tempted to spend on accounts you've chosen not to use, consider putting the cards in a safe or safety deposit box along with other valuables.

4. Carrying a balance on your card from month to month if you can avoid it

It's a common misconception that carrying a balance on your credit cards will improve your credit scores. In reality, the opposite is generally true. Going back to the credit utilization rate, it's a good idea to pay your balances in full each month in order to keep your debt-to-credit ratio low. In the process, you'll also avoid racking up interest charges.

5. Applying for new credit accounts too often

When you apply for a line of credit, the inquiry will show up on your credit reports. Multiple inquiries in a short period of time can be a red flag for lenders who see this activity as a warning sign that you're applying for credit you won't have the money to pay back. In general, try to spread out your applications for new lines of credit.

Using your credit cards more frequently during the Covid-19 pandemic doesn't have to mean something negative for your finances. By avoiding these and other common mistakes, you can feel more secure using your credit cards when you need them most, without threatening your credit history or severely impacting your credit scores.

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