Your credit score is an important and powerful tool that can assist you in achieving your financial goals. Lately, it may not be a top priority. But the COVID-19 pandemic could have a direct impact on your credit score. So, you may want to pay closer attention to your credit report. Your money decisions, from skipping a bill payment to applying for too much credit, can harm your future financial aspirations. Fortunately, there are resources and strategies available to help reduce credit score damage during this challenging time.
A Credit Score Overview
Your credit score is a three-digit number that communicates your creditworthiness to lenders or other interested parties. Credit scores can range anywhere from 300 to 850 and are calculated by the Canadian credit bureaus, TransUnion and Equifax. The higher your credit score is, the more likely it is that you’ll get approved for financial products.
The way your credit score is calculated can differ slightly depending on a variety of factors; however, this is typically how credit bureaus build your score and weigh your financial decisions:
- Payment history (35%): How successful you’ve been at making payments on time and in full in the past.
- Level of debt (30%): The dollar amount of debt you’re currently carrying and how much credit is available to you.
- Length of credit history (15%): The amount of time you’ve had credit products.
- Credit mix (10%): The different types of credit products you manage.
- Credit inquiries (10%): A credit inquiry occurs when an external party checks your credit report. Inquiries can negatively impact your credit score in the short term.
Unfortunately, the two most significant factors that impact your credit score — payment history and level of debt — can become an issue during the COVID-19 pandemic. People are experiencing a loss or reduction of income, which is making it challenging to pay debts on time and in full. Furthermore, if you’re in the midst of paying down old debts, you may find it challenging to keep up with your payments.
If you find yourself in this situation, you are not alone. Many Canadians are experiencing financial hardships as of late, and the government is offering support.
Financial Aid from the Canadian Government
The Government of Canada has devised a full economic response plan to the COVID-19 crisis. Employment insurance and deferral of tax payments are two of the most notable financial support options.
The Government of Canada realizes that many people will experience job loss as a result of the COVID-19 pandemic. If you have lost your job or are facing financial hardships, you may be eligible for employment insurance or the new COVID-19 benefit.
Deferral of Tax Filing and Payment
The Canada Revenue Agency (CRA) has deferred the tax filing date to June 1, 2020, and the tax payment date to September 1, 2020, for individuals.
Support from Canadian Financial Institutions
Thankfully, Canadian financial institutions have recognized the state of the economy resulting from COVID-19. Many banks are offering mortgage and credit card payment deferrals along with case by case financial assistance.
Each day, the relief efforts seem to evolve. Most recently, the top six Canadian banks announced they would also be holding off on planned interest rate increases, as well as offer interest rate cuts to those requiring payment deferrals.
Strategies to Manage Debt and Bills During the COVID-19 Crisis
During economic downturns, money may be tight. There are strategies you can use to manage debt and bills during difficult financial times. The sooner you implement financial tactics, the better off you may be.
- Budget: A little organization can never do you wrong! List out your income and expenses, then prepare a realistic budget. If you can, find another source of income and cut out the costs you don’t need.
- Apply for credit: Even if you don’t need credit now, that doesn’t mean you won’t need it in the future. If you wait until you need financing, you may not qualify, or you may find yourself in a lengthy application process. Secure financing now to build a safety net.
- Pay off debt if you can: If you can afford to pay off debt now, do it. You can also explore debt consolidation options or balance transfers to kick start debt repayment. Keep in mind that you should maintain a healthy emergency fund.
- Minimum payments: If you can’t afford to pay your statement in full, at least make the minimum payment. That way, you will avoid harming your credit score.
- Calendar payment reminders: Knowing when you need to make a payment can help you plan and budget.
- Emergency fund: Don’t underestimate how valuable cash can be! An emergency fund can get you out of a financial rut quickly.
- Claim a tax refund: If you have a tax refund this year, don’t wait to file your taxes.
- Communicate with lenders and service providers: If you know you won’t be able to pay a bill on time, contact the respective lender or service provider. Chances are they’ll be more than understanding during this crisis and work out a payment plan or deferral. Your courtesy of contacting them ahead of time may alleviate some financial pressure and protect your credit score!
- Research how lenders and service providers are responding: Many banks and service providers have announced a response plan. Do some research to see if you qualify and contact your financial institution to take advantage of the assistance programs.
- Don’t dip into your RRSP if you don’t have to: When you withdraw from an RRSP, the amount is considered income and you will be taxed. Plus, you’ll never obtain that contribution room back.
Financial Planning and Support Systems
When it comes to your finances and credit score, the best thing you can do is assess the situation regularly and plan for the future. Educate yourself on the relief efforts available through both your financial institution and the government. Plan for unforeseen circumstances by creating an emergency fund and building your savings. And, if you face financial hardships, know that there are resources to support you through this difficult time.