Should I Skip a Loan Payment Due to the COVID-19 Pandemic?
SALT LAKE CITY – Did you take advantage of a lender’s offer to defer a credit card or car payment due to COVID-19? Better to check your credit report.
Some consumers complain that they were flagged as delinquent after skipping a payment with what they thought was their lender’s blessing. In one case, a Florida woman had her car temporarily taken away. Some lenders reduce borrowers’ lines of credit. And millions of people with student loans on hold due to CARES law deferrals may have seen their credit scores drop.
The horror stories are unintended consequences of measures that were supposed to help struggling Americans weather the hardships of the COVID-19 pandemic. More than 20 million people in the United States lost their jobs during the pandemic; millions more have had reduced hours or been put on leave. To make matters worse, grocery price surged, even as many households had more mouths to feed during widespread closures that kept people at home.
To help, the federal government and many finance companies and banks have allowed borrowers to defer payments on student loans, credit cards, and car payments. More than 100 million payments, most of which are student loans, have been skipped since the start of the pandemic, The Wall Street Journal reported.
âIn general, I’ve been really impressed with the hardship programs that lenders have put in place,â said Ted Rossman, industry analyst for Creditcards.com. But there are signs that lenders are increasingly concerned about the financial health of Americans, with some lenders tightening standards for new credit and others lowering credit limits, even for good borrowers.
Your credit report
The volatility of the credit market is such that Americans can now consult their credit reports every week until April 2021 for free, instead of once a year as is the usual practice.
Here’s why credit experts say you should take advantage of this opportunity.
In addition to sending payments of $ 1,200 or more to many Americans, the CARES Law passed by Congress in March ordered that all federal student loan payments, both principal and interest, be suspended from March 13 until the end of September. However, suspended payments have been recorded differently by some companies that handle student loans, and some people have reported on social media that their credit scores have dropped by more than 50 points, in some cases leading to loan cancellations. waiting.
On his help to students website, the US Department of Education acknowledged that some borrowers had experienced a “negative change” in credit information, but said this was limited to third-party credit reporting sites, such as Credit Karma, and not to major credit reporting agencies: Experian, TransUnion and Equifax. He encouraged people on student loans to check their scores on these websites and said scores should not drop due to postponements, which were automatic. (Borrowers had to opt out if they wanted to continue making payments.)
Brian Gilder, a certified financial planner in Los Angeles and author of âThe Financial Playbook,â said people should already be doing it whether or not they have a student loan. The Federal Trade Commission has urged consumers check their scores regularly, especially if they have made special payment arrangements due to the pandemic.
âFor whatever reason, they can put a missed payment into it, and if that happens, it can really hurt your credit score,â Gilder said. “If you find an error, you want to dispute it immediately.”
Another thing a credit report can reveal is the total line of credit associated with an account, which can also hurt your score if it goes down. Lenders are allowed to do this, but they must give the consumer 45 days written notice. And they can do it even if you are a long-time, loyal customer. This recently happened to Rossman, who was told by a lender that he was about to reduce his available credit because he had not used the line of credit often enough.
During the Great Recession, said Rossman, about 20% of lenders cut or cut lines of credit for prime borrowers; the number rose to 60% for subprime borrowers. As such, it’s no surprise that lenders are doing it now.
That said, the combination of stimulus money and forbearance and deferrals offered by lenders has so far prevented a wave of bankruptcies and defaults.
âNot to downplay people in trouble, but I was struck by the fact that 6-10% of borrowers go into one of these (deferral) programs, which I think is really low,â Rossman said. “And even among those at some stage of forbearance or postponement, many continue to make payments, and some banks are closing hardship programs for lack of use.”
Costs vs benefits
This has not been the case for everyone.
Shelley Tanner, a nurse in St. Petersburg, Florida, decided to accept her credit union’s offer to defer two car payments, and her car was repossessed because she did.
According to WFLA, a Tampa TV station, Tanner’s postponement request triggered an audit of his account. Most lenders offering deferrals only allow them for up-to-date accounts. The credit union said it discovered that Tanner’s monthly payments were 66 cents less than was due, officially making her past due, and the car was repossessed. After WFLA reported the repossession, the car was returned.
This is just one example of the little things that could ruin a person’s credit rating if people don’t pay attention and take action when something changes.
As to whether the potential to damage one’s credit rating is reason enough to avoid a deferral offer, it depends on the individual’s circumstances, said Talin Larson, certified personal finance advisor with AAA Fair Credit Foundation, based in Salt Lake City. âI recommend that they seek help by talking to different resources and gathering as much information as possible. Every individual situation is different, so it’s best to look at each situation differently and come up with a unique plan based on the individual, âsaid Larson.
While there have been complaints that some people have taken deferrals while employed and able to make payments, Gilder said it could be a smart move, if those borrowers understand the costs.
âThere really is no right or wrong answer. The question to ask is: can I sleep at night? Some people need to have this extra money in the bank, âhe said. âRight now, you can sacrifice your long-term financial needs to protect your short-term needs to get through this ordeal. This is one of the reasons people take money out of 401 (k) s. “
This is another provision of the CARES law: the usual 10% penalty for early withdrawals of a 401 (k) for people under 59 and a half is removed in 2020 for coronovirus-related claims.
As to what happens when these programs expire, no one knows, but “lenders are feeling very cautious,” Rossman said. âSo far, everything is going well, relatively speaking. I think there is a risk to come, once these programs expire and if they are not renewed. What happens then? It is certainly a concern.
Meanwhile, Gilder recommends that people check their credit report at www.annualcreditreport.com at least every few months, more often if they have deferred payments. And with regard to that reduced line of credit – Rossman got his reinstatement by calling the lender and asking.