Building Credit Living Paycheck to Paycheck

Man going over finances to find ways to save money while living paycheck to paycheck.

If you’ve lost a job or lost a portion of your income during the pandemic, you’re not alone. Since March, millions of people across the country have applied for unemployment benefits. If you’re worried about what will happen to your credit while facing a financial setback, know that it’s possible to maintain credit or even build credit during this time.

Your credit score is essentially a three-digit grade of what's on your credit report. Creditors review your reports and scores to decide whether to lend to you and at what cost. If you’re wondering how to build credit or how to fix credit while living paycheck to paycheck, this guide has a few strategies that can help.

Pull Your Credit Reports

The first step is pulling your credit reports to see where you stand. Under the Fair Credit Reporting Act (FCRA), you’re entitled to one free credit report from each credit bureau every 12 months, and you can get your reports at AnnualCreditReport.com. If you already obtained those free reports, Fifth Third Bank offers monthly triple bureau credit reports for just $7 per month when you have a Fifth Third Checking or Express Banking® account.

Next, comb your credit reports for errors and incomplete records. If you find inaccurate, incomplete, or outdated information, write a letter to dispute it with the credit bureau. Credit reporting agencies must investigate disputes (unless deemed frivolous), and unverifiable records must be removed. Getting rid of incorrect negative history could have a positive impact on your credit score.

Make At Least Minimum Payments—And Get Ahead Of It When You Can’t

Payment history has the most influence on your credit score, so keeping your accounts in good standing during this time is key. If necessary, revisit your budget to make sure you can make at least minimum account payments and notify your account issuer right away if you can’t keep up. Since late payments can stay on your credit report for up to seven years, being proactive could help you avoid having a long-term blemish on your record.

Some financial institutions are offering payment relief programs in response to customers facing financial challenges. Fifth Third, for example, has COVID-19 financial assistance resources to support customers. You may be able to qualify for up to 180 days of mortgage forbearance. Interest will still accrue while the loan is in forbearance, but there will be no late fees and your loan account will be reported to the bureaus as current. A break from payments can ease the financial burden while you get back on your feet.

Avoid Increasing Your Balances

Adding to your credit card balances can increase your credit utilization ratio, and this can negatively impact your score. The credit utilization ratio compares your total available revolving credit to the balances on your revolving credit accounts. For example, if you have three credit cards with credit limits totaling $15,000 and a total balance across all cards of $8,000, your credit utilization is 53%.

Experts recommend a credit utilization of 30% or lower. If you’re wondering how to build credit fast, paying off a large portion of your debt to lower your utilization could be one way to do it. But, understandably, paying off debt may not be possible right now while funds are tight. For the time being, try only charging what you can pay off by the end of the month. And explore all of your financial options, such as filing unemployment or pulling from other financial resources, before relying on credit cards to make ends meet.

The CARES Act of 2020 loosens tax rules for people who decide to tap into retirement savings to bridge a financial gap. COVID-related early retirement withdrawals made before the end of this year will not be assessed the typical 10% tax penalty. And you can now borrow up to $100,000 or 100% of your vested 401(k) balance without paying income tax if you repay the loan within five years. Of course, there are pros and cons to consider here as well since withdrawing from your nest egg could put you off track for retirement.

Think Twice Before Closing Accounts

You may find you’re hardly using your credit cards now if you’re spending more time at home, but this doesn’t mean you should close down accounts. Open accounts with available credit can contribute positively to the credit utilization ratio we discussed above. If you’re worried you’ll get tempted to swipe, consider putting credit cards in the back of a drawer rather than canceling them altogether.

Apply for New Accounts Sparingly

Try to hold off on new account applications unless it’s absolutely necessary. Applying for new credit accounts one after the other can be a signal to lenders that you’re a credit risk.

There is one caveat to this: If you are shopping for a new mortgage, car loan, or student loan, comparing multiple offers can help you find the right product. The FICO score model recognizes many hard inquiries for installment loans within 30 days as rate shopping inquiries, and it can be less impactful than applying for many credit lines in a short period of time.

In summary, building credit and maintaining credit during this time is all about keeping up with your debt payments and not letting your debt spiral out of control. This can’t be stressed enough—don’t suffer in silence.

If you’re struggling to keep up with credit card or loan payments, reach out to your creditors to explore payment relief options. A payment arrangement could help you avoid a flurry of missed payment records that will stay on your report for several years to come. Learn more about protecting your financial health with Fifth Third Bank’s COVID-19 Wellness Checklist.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.