Pandemic Credit Card Debt On the Rise

It’s no secret COVID-19 has taken an economic toll, and with so many people out of work, credit card debt has spiked.  A new survey indicates 47 percent of American adults are carrying credit card debt. That’s about 120,000,000 people, and that’s up 43 percent from early March.  The reality is that it’s become a lot harder to make ends meet and people are turning to their credit cards.  So, we’re turning to Lee Kendrick, a credit expert in the founder of credit u-turn, for some help on managing that debt.

The best advice used to be, don’t use your credit cards, but now, if you have to you got to do what you’ve got to do.  A few months in and people are already skipping their payments to make ends meet.  What should you do?  Should you go to the credit card issuer first and ask for a break?  If you have to, absolutely, and that holds true for mortgage lenders as well as automotive lenders.  Don’t procrastinate reach out to them immediately!

You typically do have some options.  Forbearance or deferment.  But, what’s the difference between the two?  Which is more favorable?  For the most part, when it comes to credit card lenders, forbearance really isn’t the same as it is for student loan borrowers and some other loans.  However, due to the Cares Act, there is a forbearance clause within that legislation, so whenever you reach out to your credit card vendors, you need to make sure that you understand whether or not they’re talking about a deferment option or a forbearance option.  When you enter into the forbearance, you’re still responsible for repaying accumulating interest as well as potential other fees that they’re charging.  The difference between the two is simply that deferment is always your better option because normally don’t have to pay additional fees, as well as additional accumulating interest charges.  Forbearance is usually a very short-term option, and often leads into other financial quizzes, such as whether or not you’re actually capable of repayment.  This could potentially cause them to lower your credit limits.  Forbearance does one have more of an impact on your credit score because any time that you’re accumulating those additional fees and interest, that can actually affect your utilization ratios as those balances increase.  But, here’s the other problem: credit card companies are slashing credit cards limits, with no warning to you.  So, you need to be proactive whenever it comes to that. 

One of the first things that we recommend is to look at what all of your available options are.  What are your own resources?  Do you have money that you would normally reserved for investment strategies, whether it’s your 401K,  IRA, or in stocks, bonds, or even just have a family member or you’ve got a relationship with?  A lender that can help you pay down those balances?  Whenever you pay down those balances, you’re eliminating your the risk to those credit card vendors and those credit card vendors are less likely to lower your credit limits.  Why?  Because you are able to pay those balances down and you’re demonstrating that the current pandemic is not affecting you.

If this is not an option, you may have to do some credit cleanup later on, but we fully expect that there will be some allowances made in the future for pandemic debt accumulations.  We’re just now sure what those will be at this point.

Should You Skip Your Mortgage Payments Now?

Right now, an unprecedented number of Americans have lost their jobs, lost a large portion of their income, or worse, and simply aren’t able to pay their bills.  But what about you?  What bills should you pay?  And what bills should you skip?

Truthfully, if you have the money, you should pay ALL of your bills as usual for as long as you can.  Don’t be one of those people who are still working, yet use the pandemic to skip a mortgage or car payment.  Believe me, you will be sorry in the long run if you choose to go that route.  We still don’t know what the fallout with respect to our credit reports (and credit scores) will be as none of the legislation that has been enacted either directly or indirectly addresses payments that are skipped during this unprecedented time.  Already, we’re seeing lendors of all types, from home mortgage lenders to credit card providers, put stricter requirements in place to even qualify for a new loan, and/or cut back on credit limits, the types of loans available, and more.  So, if you can pay your bills, do so.

However, if you cannot pay your bills, the most important thing that you should do is to sit down and see what your options are with each and every bill that you have.  Does your mortgage provider have a forbearance option?  If so, will that affect your credit report, and if so, how?  What about your car loan?  If there is no effect on your credit score, these may be your best options.  If not, then look at your credit card bills.  Many are offering some type of special payment arrangements, but again, ask what effect this will have on your credit score.  Next, look at your local utility companies.  Many states have passed legislation regarding utility services, so chances are, your local providers will not shut off service if those bills are late, so that may be a viable option if you are strapped for cash.  The main thing is that you look at all of your options.

Whatever you do, don’t just stick your head in the sand.  Communicate with each and every one of your creditors for any bills that will be late, even if it’s only a few days.  Let them know when to expect payment.  Request that late fees, if any, be waived.  Request that they not report it to the credit bureaus.  And, if they do, make sure that you add a statement to your credit file explaining why the payment was late.  As hard as it may be to address these issues now, it will save you years and years of grief in the long run.