Getting Your Credit Back on Track Post-Pandemic

The COVID-19 pandemic wasn’t just a health crisis—for many people, it posed financial hardships as well. Unemployment rates soared, reaching nearly 15% at their high-point, as shelter-in-place and social distancing restrictions forced businesses to reduce their work or close down altogether.

Unemployed or underemployed workers may have found themselves suddenly needing to make hard decisions about which bills to pay or relying on credit. Now, as employers bring back workers and consumers regain their financial footing, their credit may be reflecting the consequences of the crisis.

Fortunately, the short-term pain to your credit score doesn’t need to turn into long-term damage. Assessing your credit now and then taking action to repair it can minimize the impact of the pandemic in the near-term, and improve your ability to access additional credit at reasonable terms in the future.

Review Your Credit Report

Checking your credit report annually is always a smart idea. But it’s even more critical if you’ve experienced some financial challenges that led to missed payments or increased debt. Request a copy of your credit report from each of the three credit bureaus, using annualcreditreport.com. Everyone is entitled to a free copy of their report from each bureau once a year, so be wary of any company that charges a fee for access to your credit information.

You also want to make sure your report reflects what you know about your financial circumstances. For example, if you were up-to-date on mortgage payments and then requested forbearance during the COVID crisis, your report should note that you were not behind on your payments before your loan went into forbearance. In the same vein, if you negotiated a reduced payment or deferred payment schedule with lenders, also make sure that your credit report doesn’t erroneously note that you were late or behind.

Circle Back with Your Lenders

Multiple banks and lenders implemented COVID-related relief plans to help borrowers financially impacted by the pandemic. They offered deferred payments, waived late fees, and promises to not report short-term solutions to the credit bureaus. However, most of the relief programs expired within a few months. Check back with lenders and creditors to ensure you know the plan going forward.

Do your payments resume the same schedule that you had before the pandemic? Did you accrue interest on your deferred payments? Ensure that you understand what’s happening with your debt, and credit for the long-term and don’t assume that everything returns to a pre-pandemic normal.

Create a Repair Strategy

If you did accrue a significant amount of debt over the crisis or missed payments, you’re not alone. But the sooner you take measures to repair your credit score, the better off you’ll be. Build a strategy for paying down your debt, beginning with any accounts that are past due. Make payments on the accounts that require immediate attention to ensure you’re up-to-date and not accruing penalties or further damaging your credit score.

Once your accounts are current, assess your credit utilization ratio, which reflects how much of your available credit you are using. FICO recommends that people keep their debt to less than 30% of their available credit. So, for instance, if you have a credit card with a $20,000 limit, then you should try to keep your debt below $6,000.

This goes for your debt on each card as well as your total debt overall. Paying down your debt to ensure it is within this range will help bring your credit score back up. Also, the bureaus recommend not closing unused credit cards at this time—they help keep your available credit high while you pay down your debt. Finally, establish a plan for paying that debt down. Prioritize paying down debt with the highest interest first—or consider rolling your debt into a lower-interest card, if possible.

Create a Budget for the New Reality

If you’re back at your job or your employer is nearing business-for-the-new-usual, then your acute financial hardships may be over. That said, preparing a budget that reflects any new changes in expenses and income makes sense. For instance, you may want to reduce spending to help pay down your debt, as discussed above. Or divert money that you previously spent on entertainment or travel toward debt payments or savings.

If possible, creating an emergency savings cushion can also prevent you from needing to lean on high-interest credit if you do encounter another financial emergency in the future. Financial experts suggest saving between three and six months of expenses in a high-interest savings account or other highly liquid savings vehicle.

Finally, continue to monitor your credit throughout your recovery process. You can subscribe to a credit monitoring service to ensure that the information in your report remains accurate. Or you can meter out your three free reports over the course of a year to provide a regular look at what’s happening with your score.

The pandemic was—hopefully—a once-in-a-generation catastrophe. That it caused some financial distress is not surprising. However, do what you can to remediate any damage as soon as possible, and you'll recover from the crisis that much more quickly.