The impact of the coronavirus pandemic on credit scores and small business access to credit may be felt for years. Loss of income and the dramatic drop in revenue for businesses, both large and small, results in many companies and individuals not being able to pay their rent or mortgages and other bills on time. Many are incurring more credit card debt, which is troublesome because credit card interest rates generally are higher than the rates charged for bank loans.
According to WalletHub’s Coronavirus and Credit Score Survey, 87 million people are worried about their credit scores because of the coronavirus.
The overwhelming majority of Americans believe that missed payments during the coronavirus should … [+]
“Americans are worried about damage to their credit scores due to the coronavirus pandemic, whether from taking on additional debt or missing payments on bills,” said Jill Gonzalez, WalletHub analyst. “Middle-income individuals are more likely than high-income or low-income people to worry about their score, which could be because they don’t have many assets to fall back on, but don’t qualify for government assistance with their expenses.”
About 60 percent of survey respondents are worried about paying a paying is their mortgage or rent payment, followed by credit card payments.
“Although around 40 percent of people do not anticipate trouble paying any type of bill during the coronavirus pandemic, some of this confidence may be attributed to the recent stimulus payments or increased unemployment benefits. It may not be indicative of their financial stability should current restrictions persist for longer than expected,” Gonzalez said.
Not surprisingly, a large majority (86%) of Americans agree that credit scores should ignore any missed payments during the coronavirus pandemic. Financial priorities vary by age: Millennials’ top financial priority right now is paying bills, while Gen Xers’ top priority is preserving cash.
With many businesses mandated to be closed because they are “non-essential” and others operating but at a fraction of capacity, the financial impact is widespread. Business owners are negotiating with their creditors for forgiveness or reductions in paying rent. Some landlords are understanding, while others are under their own financial pressures and are unwilling to negotiate.
Of course, missing a rent or mortgage payment is a knock against a credit score, as are missed or late credit card payments.
Credit scores play an important role in the decision-making process of traditional lenders, including most business bank loans. Usually, the higher your credit score is, the greater your chance of receiving a loan. After all, a bank’s primary concern when lending money is: Will this person be able to pay it back? A high credit score (700 or above) is a strong indicator of the likelihood of repayment.
Borrowers with strong credit ratings are also more likely to get better terms and lower interest rates than those with poor credit histories. It is riskier to lend money to someone whose track record of repayment is mediocre or worse. Borrowers pay a premium for having the lenders accept that risk: it comes in the form of higher interest rates.
Advice for maintaining your credit score during the coronavirus pandemic
1 Check your credit report
Look for any errors that could bring the score down. Many companies will provide the report for free.
2 Negotiate Now
Ask your creditors to work with you to come to more agreeable terms. They may be understanding if they are under similar pressures. See if your credit card provider is willing to be flexible with minimum payments, deferred payments, and/or the interest rate they charge. (It is often 15% or more.) Gaining such concessions could keep your account in good standing, thereby preventing missed payments from showing up on your credit report and hurting your score. You certainly do not want a deferred payment to be marked as “past due” to the credit bureaus.
3 Pay on time, even if you cannot pay in full
Unless you make at least the minimum payment required by your credit card company, you will not get credit for paying on time – even if you pay by the due date.
4 Cut costs
Frugality is back in vogue – not out of want, but out of necessity. If you can put off major projects or renovations, do so. If it isn’t necessary to run your business, don’t buy it. Lower your inventory. Reduce staff hours — as long as you do not endanger giving up the “forgivable” nature of the CARES Act’s Payroll Protection Program (PPP) loans that would then have to be paid back. Some employers have gained concessions on pay and cut their own compensation, as well. With the cost savings, conserve the cash for bills that you are having trouble making.
Although the PPP lending program initially got off to a rough start, small business owners are reporting that are now able to secure government-backed funding that is helping to keep their companies alive during these uncertain times.
We don’t know how much things will change when we get back to “normal,” but maintaining your credit score is an important step if your firm needs to borrow money somewhere down the road after the emergency stimulus funding evaporates.