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In case of emergency: Protecting your credit from the unexpected

Unexpected circumstances have the potential to put your finances—and your credit—in jeopardy. Yet, the idea that your credit is destined to suffer when emergencies happen isn’t quite right.

Consider the coronavirus pandemic, for example. While many Americans experienced financial hardship, the average FICO® Score actually increased among U.S. consumers between April 2019 and April 2021.

The fact that FICO® Scores have trended upward nationwide despite the pandemic should be encouraging news. It indicates (at least to some extent) that there are effective measures you can take to protect your credit amid unforeseen circumstances.

How emergencies can affect your credit score

Whether you’re facing a job loss, illness, natural disaster, or one of the many financial challenges that can arise during a global pandemic, emergencies can put a strain on your budget. And when situations like those outlined above arise, your credit score could be at risk.

Unexpected expenses

From auto repairs to surprise medical bills, unexpected expenses are a reality that every household may face from time to time. Nonetheless, a recent Bankrate survey found that fewer than half of adults in the U.S. had the savings available to pay for a large, unplanned expense.

There are ways to handle emergency expenses without putting your credit health in jeopardy—even when you lack the savings to cover them. However, if you’re not careful, unexpected expenses could lead to credit-damaging problems such as:

An unexpected expense won’t hurt your credit, but the way you respond to a financial emergency may factor into your FICO® Scores.

Changes in interest rates

The interest rates you pay on your credit obligations do not influence your FICO® Scores. But an interest rate hike on a credit card or other revolving account could have a meaningful impact on your household budget.

Interest rate changes might have an indirect effect on your credit, as well. Below are a few examples.

A higher interest rate could:

  • Increase your credit utilization rate on a credit card. If you don’t pay your credit card balance in full each month, you’ll typically have to pay interest charges. The card issuer adds those charges onto your existing balance, and it increases the amount of debt you owe. A higher balance can trigger an increase in your credit utilization ratio—a scenario that could have a negative impact on your FICO® Scores.
  • Make your monthly payments increase. Higher interest rates can lead to larger balances and monthly payments on your credit obligations. If your budget is tight, the added pressure might be too much to handle. When an interest rate increase leads to late payments or missed payments altogether, those actions could negatively impact your FICO® Scores.

How to protect your credit in case of emergency

On a positive note, it is possible to protect your credit from the unexpected. Tom Quinn, vice President of Scores at FICO, says that building healthy credit to withstand unpredictable circumstances isn’t much different from the actions you need to take to build a healthy FICO® Score, in general.

Prepare ahead of time

The first key to protecting your credit in case of an emergency is to prepare in advance.

“The time to try to make your credit healthy is not on the cusp of an unpredictable circumstance,” says Quinn. Instead, you want to make an effort to cultivate a good FICO® Score ahead of time.

There are many ways to try to improve your credit score if you aren’t happy with its current condition. Yet, it’s important to note that a history of on-time payments is one of the most important factors impacting your FICO® Scores.

“Demonstrating that behavior [paying bills on time] all the time results in a lot of positive points for the score,” Quinn says. “And that’s something that you would want to strive for… to be able to withstand unpredictable circumstances and have a good FICO® Score.”

Build an emergency fund

Another way to protect your credit from the unexpected is to build a solid emergency fund. A financial safety net could help you avoid indirect credit issues (like late payments) that might come up in an emergency.

“It’s important to be able to cover bills and other obligations that you may have in the event of lost income, a lost job or a major expense like a major car repair or house repair,” says Quinn.

For this reason, many financial experts recommend having at least six months’ worth of monthly expenses tucked away in a savings account for emergencies.

If the six-month figure seems daunting to you, remember that it’s okay to start small. You can set an initial goal—perhaps of $1,000—and build from there. Any amount of savings can put you in a better position to weather the unexpected.

Work with your lender on a payment accommodation plan

Sometimes spending cuts and savings aren’t enough to help you keep up with your payments during an emergency. If you find yourself in a situation with more bills than money, it’s worth talking to your lender to see if any special payment accommodations are available.

“You could always reach out to your lender to make them aware of your stressful circumstances,” Quinn says. “Many lenders would want to keep you as a customer and work with you to try to ease the pain on a temporary basis of that situation that you find yourself in.”

If your lender agrees to a payment accommodation due to a natural disaster or pandemic (such as a loan forbearance or deferred payment plan), the fact that your account is enrolled in such a plan shouldn’t impact your credit score.

Consider financing

Strategically opening new credit accounts also has the potential to protect your credit in an emergency. Here are two scenarios to demonstrate why applying for new credit might help you prepare for the unexpected.

  • An extra credit card could provide a financial cushion that’s easy to access when you need it. Just be sure to use the credit card wisely (along with all of your other accounts) so it doesn’t lead to unnecessary debt and overspending. Paying off your full statement balance each month is an important habit to develop.
  • Consolidating debt with a low-rate consolidation loan or balance transfer could benefit you in several ways. If you can use a new account to save money and pay down your debt, debt consolidation might help you put yourself in a better financial position before the next unexpected expense arises.

The bottom line

Trying to maintain healthy credit may be low on your priority list when you’re facing a stressful financial emergency. Yet, because credit can have a significant impact on your overall financial health, it is worth trying to protect.

Quinn recommends staying on top of your credit reports and scores, especially during uncertain times.

“It’s something that doesn’t take a lot of time, and it’s a good process to follow to make sure you’re aware of how your information is being reported and how lenders are interpreting it,” Quinn says.

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