How to manage your credit health when times get tough
Maybe you lost your job or see layoffs on the horizon. Maybe you experienced an unexpected medical issue that's put your salary at risk, or the economy has you worried about what the future may hold for your finances.
You are not alone. Many people go through periods of financial stress. Here are some strategies to help you cope if you're facing a time of uncertainty.
Work proactively with your creditors and lenders
If you're struggling to pay your bills, call your auto lender, mortgage lender, and other creditors or service providers to explain the situation and figure out your options. Your lender might agree to temporarily adjust your payments. If you have federal student loans, you may be able to use deferment or forbearance to take a temporary break from payments without hurting your credit health.
Other lenders or creditors might agree to reduce your monthly payments or even avoid reporting any late or missed payments to the credit bureaus. Make sure to document in writing the communications you have with your creditors and carefully read the terms of any new option the lender proposes.
- Be proactive and reach out to your creditors if you find yourself in a difficult financial situation. Always ask about revised payment options or other solutions before you start dipping into your savings or relying on a credit card to pay your bills.
- Continue to make on-time payments. Missed loans, mortgage or credit card payments are usually reported to the credit bureaus every month. Not paying your bills could also make it harder to access new credit and make an uncertain situation worse.
Review your current expenses
Take a look at your monthly expenses to find out if you can adjust your budget. Is there an opportunity for you to spend less money throughout the month? For example, you may want to consider canceling or pausing subscription services. You can then use that money for other expenses.
Spend from your emergency fund
You could also choose to pay your bills and other essential expenses with what you've got saved up in your emergency fund. By continuing to pay your bills on time, you won't have to worry about accounts going into collections or late payments showing up on your credit report. However, depleting your cash reserves means you'll have less financial flexibility if you face another hurdle down the road. It's important to start rebuilding your emergency fund as soon as your financial situation improves.
Take out a personal loan
As another option, you can apply for a personal loan to cover your expenses. However, the loan will show up on your credit report, and you'll need to pay it back over time with interest. Lenders will complete a hard credit check when you apply, which will also appear on your report. If you're deciding between taking a personal loan or using your credit cards, shop for the best interest rates and terms, and then compare the total costs for each option.
Consider your credit cards
You could also use your credit cards to pay your bills. However, some service providers may not accept credit cards or may charge you a fee if they do. Think very carefully before you start paying bills with your cards, since balances can accumulate quickly and potentially drag you further into debt. You should only explore this option as a short-term solution.
You could also think about taking advantage of balance transfer offers to save money. For example, you could move a higher interest credit card balance to one with a temporary 0% interest rate. Then, you could use the money you save on interest to pay other bills. You may also consider getting a new card with a zero-interest period or one with a higher amount of available credit.
However, using your credit cards to pay your bills may not be the best option if you anticipate needing them more than a few months. You could end up accruing significant balances which could make it harder for you to pay your minimum payments. This could make your financial situation even more challenging.
Keep in mind that:
- Relying on credit cards could lower your credit score. If you continually carry a high balance on your cards, you might increase your credit usage which could hurt your credit.
- Asking for a credit line increase or opening a new credit card can result in a hard credit check, which can also impact your score.
No matter what happens if you are eligible to take out a loan, always make sure you continue to make your minimum payments on all your credit cards.
Dip into a retirement account
As a final option, you can try to get a loan or hardship withdrawal from your retirement account if you are eligible for a withdrawal. This won't impact your credit health, but you may reduce your account balance. If you are eligible to take out a loan, you'll need to pay it back over time with interest, but it won't show up on your credit report. If you don't qualify for a hardship distribution and take a withdrawal if you are eligible for a withdrawal, you may owe taxes and penalties on the amount you use.
Ask your plan administrator or check your plan documents to learn more about which withdrawal types you may qualify for, their repayment requirements and fees. Consider how the options you're exploring could impact your financial future.
- Many people go through periods of financial stress, but there are strategies to help you cope if you're facing a time of uncertainty.
- Be proactive in reaching out to your creditors or lenders as soon as you see the first sign of financial uncertainty.
- Ask about revised payment options or other solutions before you start dipping into your savings or relying on a credit card to pay your bills.
- Some options, such as spending from your emergency fund or taking a hardship withdrawal from a retirement account, should not affect your credit.
- Other strategies, such as turning to your credit cards or taking out a personal loan, will increase your debt and may negatively impact your credit health.
- Missing bill payments could have a negative impact on your credit health.
- Access the score simulator and your score factors to get personalized insights on how the choices you make might affect your credit.