Maintaining your credit score during Covid-19 means you’re more likely to be accepted for loans and charged lower rates.
If your finances have taken a hit because of Covid-19, the things that you might be doing to compensate, could be negative for your credit score.
Even if you’ve been lucky not to suffer financially because of Covid-19, it’s always a good idea to brush up your credit score.
Here are four tips for maintaining your credit score during Covid-19.
If you’re applying for credit…
During the first six months of Covid-19, credit card and new loan applications fell considerably. However, applications for higher cost credit cards have increased by 140% in the last two months.
If you’re considering a higher cost credit card (APR over 30%), read our article on how much this might cost. You can also use the Money Advice Service credit card calculator.
Each ‘hard search’ on your credit file can reduce your credit score. The more searches, the greater impact on your credit score. Consequently, it will be harder to get credit next time around. You can opt for creditors that perform soft searches. However, making a full application will result in a hard search.
If you’ve been shopping around for credit, many searches may appear on your credit record. Added together these will reduce credit score even further. Moreover, some lenders will even have policies to automatically decline you for an application if, for example, there were more than four searches in the last three months.
Watch that credit card spending
If you’ve been making up for lost income by shopping on credit cards this can reduce your credit score.
Your score will fall the closer you are to your limits. Your credit score (as well as your pocket) will also suffer if you’re paying just the minimum balance. Furthermore, the longer you hover at your limits, the worse this will be for your credit score.
If you’ve been borrowing your debt ratio may be increasing. Simply put, a debt ratio is how much you’re borrowing (excluding the mortgage) divided by your income. A higher debt ratio means you’ll be more likely to be rejected for a loan.
Whenever you take out a new loan your credit score falls. This is because you’ve not yet had an opportunity to prove that you can afford to repay the loan. Because of this, the status on your credit profile for this new account will be ‘unclassified’. Whilst this status in itself does not always reduce credit score, nor does it have a positive effect. It can take a couple of months for good payment of a new loan to contribute towards your credit score.
Furthermore if you’ve recently taken out a loan and then apply for more credit, it is unlikely that a lender will grant a loan if there’s a fresh loan on your credit profile with no or very few payments made against it.
Mortgage payment holidays
You may have taken a mortgage or loan payment holiday. These will not affect your credit score. However, the initial protections for borrowers came to an end on 31 October – so any arrangement you come to with a lender if you are struggling to repay, after this date, will impact your credit score.
The Financial Conduct Authority have issued updated proposals to extend this support. As soon as these are confirmed, we’ll let you know.
Despite this, there is an ongoing commitment from lenders to support borrowers who cannot make their normal payments. However, these will show on your credit report.
Any agreement may be recorded as an Arrangement to Pay. Consequently, your score will fall. Because you’re not up to date with the original agreement, your payment status will move from 0 (no missed payments) through to 1,2,3,4,5 and 6 which indicate the number of missed monthly payments. If you’re in an arrangement, the lender should not record a default against you.
But most importantly if you are struggling to repay your debts – especially your mortgage – then you should seek advice at the earliest opportunity.