CARES Act and your credit score: What you need to know
Tuesday, 30 June 2020
The coronavirus pandemic has impacted almost every American in some way.
If you are one of the millions of Americans who has become unemployed as a result of the crisis, or your income has been reduced, that may have taken a toll on your financial stability.
Fortunately, many Americans are eligible for relief programs that allow extra time to pay bills such as mortgage, rent, credit cards and loans. If you are approved for a relief or forbearance program, that may ease the financial pressure until you are able to regain lost income, and it can help protect damage to your credit from late payments.
Late payments can cause your credit score to drop. The Coronavirus Aid, Relief and Economic Security Act (also known as the CARES Act), passed by Congress in late March, requires lenders to report to credit bureaus that consumers are current on their loans if consumers have sought relief from their lenders due to the pandemic.
Why your credit score matters right now
In a time of financial crisis, people who don't have a fully-funded emergency savings account may need to rely on credit to maintain stability. The coronavirus pandemic has created a great deal of economic uncertainty. Having the ability to access credit could be important if the crisis drags on.
However, if you start making late payments now and your credit score is damaged, it could be more difficult to get more credit if you need it later.
How to protect your score during the crisis
Many lenders are offering special payment arrangements, but it's not automatic. If you need extra time or reduced payments on your mortgage, credit card or other loans, you should contact your lender to discuss payment arrangement options.
If you're proactive and contact your creditors before missing a payment and are able to make a special payment arrangement, the CARES Act forbids them from reporting negative information, such as delinquency, on your credit report. For instance, they can't report you for late payments if you've contacted them and made a payment arrangement, as long as you're complying with the requirements of the arrangement. If your account was already delinquent when you entered into a payment arrangement with your lender, that lender is not permitted to report you in a greater state of delinquency because of the agreed upon payment arrangements. However, your lender is permitted to maintain your account at the current state of delinquency until you have remedied that delinquency.
According to the law, a creditor must report as current any account that has a payment accommodation applied to it, as long as the account was current when the accommodation was made. The CARES Act defines “accommodation" as an agreement to make partial payment, to put a loan in forbearance, to modify a loan or to offer any other relief to a consumer who is affected by the coronavirus disease 2019 (COVID-19) pandemic. The CARES Act also provides that if your loan is delinquent when you make payment arrangements with your lender, that lender can maintain your account status as delinquent until you bring your account current. Then the lender must report your account status as current.
You can also preserve your credit score by continuing to pay bills when they're due. If you need extra time to make payments, you should contact your lender. But if you are able to continue paying your bills on time, doing so is the smart strategy. Getting a forbearance or extra time to pay is just that—extra time. It's not forgiveness. You'll still owe the same amount, plus interest. By paying as soon as you can, you won't have to worry about that bill in the future.
How long will the CARES Act protect credit?
The CARES Act protections apply to all agreements made between January 31, 2020, through July 25, 2020, or 120 days from the date the COVID-19 national emergency is declared over, according to Experian.TM
If you were already behind on payments before the beginning of the pandemic, your credit report will reflect that delinquency until you've caught up. But as long as you are making payments according to your payment agreement with your lender made since January 31, your credit shouldn't be affected.
As a result, you can take advantage of help to pay your bills during this crisis and work on keeping your credit intact.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards.
You may also be interested in:
How to boost your credit score
Almost every financial action you take is influenced by your credit score. What does yours look like? Check out these tips to boost your credit score.
How to avoid bankruptcy
Are you deep in debt? Bankruptcy should be a last resort. Check out our advice for how to manage and overcome your debt without declaring bankruptcy.