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.

Repairing Your Credit Score

As if 2020 wasn’t bad enough already, what with a pandemic, lockdowns, and an economic downturn unlike any other, millions of people also lost their jobs… and that will leave millions of us with blemishes on our credit reports that can and, in many cases will, take years to clean up.  We all know what the effect of just one missed payment can be, but what about months of missed payments?  What about repossessions, evictions, and the inevitable court cases that are sure to arise?  Is there anything that can be done to salvage some of your credit score?

Although there really is no good answer to these questions, there are some things that you can do to mitigate some of the damage:

  • Review your Credit Report:  Even though it is not a particularly pleasant activity in light of recent events, sit down and go through every single item on your credit report.  Make a list of the changes (favorable and unfavorable) over the past few months, and then, address each of the unfavorable items individually.  What options are available to you for correction of each and every item?
  • Put a Statement in your Credit File:  Most credit bureaus have the option for you to put some notes, explanations, letters, etc., into your file.  Take advantage of those options!  While it may not improve your score, it will help future lenders, employers, etc., to see exactly what caused the problems that are in your credit file.  And, while it might not seem important to you now, having a note about your job loss due to the pandemic will definitely help to explain those late charges on your credit cards later on.
  • Find and Dispute Errors:  Errors in your credit file are far more common than most people realize and taking the time to review and remove negative, inaccurate information is vital to maintaining your credit file.  Common problems include incorrect name, address, phone numbers, accounts belonging to others, identity theft, data errors, and more.  Dispute each and every single issue that you find – identify, clarify, and submit backup documentation to substiantiate your claim, then as that it be corrected or removed.  It may take time, but it can and should be done!
  • Watch your Credit Score as closely as you do your bank account:  With so many free credit monitoring services available, there is really no excuse for not knowing what your score is and exactly what is impacting your score at any given time.
  • Make your payments on time:  Once you get past your problems and get your income back on track, get your payments back on track as well.  Many people figure that there’s no way they’ll ever catch up or repair delinquencies, so they just ignore them without ever making the effort to get back on track.  That’s the wrong approach – contact your creditors and work out a plan to get each and every account up to date.  You might even be able to negotiate the removal of those late payment notifications in return for catching up, but first you have to try.
  • Get your Credit Utilization Score down as soon as possible:  Since this one thing makes up a huge part of your credit score, getting it down below 30% is vital to improving your score.  (Get it under 7% and that puts you in league with those who have “very good” credit.  1%-3% puts you in league with those who have “exceptional” credit.)
  • Increase your Credit Limit:  Although this is not always the best route to take, opening a new credit card can decrease your credit utilization, and therefore, increase your credit score.  Just be sure that you don’t make the mistake of overusing your new credit card and/or applying for too many new cards!

Remember, you’re not alone in this situation.  Millions of people around the world have been negatively impacted by recent events, so your hard work to repair your credit will undoubtedly pay off in the future when lenders have to decide who among us is worthy of new credit.

Personal Loan Options for People With Bad Credit Scores

With the financial crisis created by the pandemic, many people are finding themselves in need of an influx of cash to get back on their feet. If your credit score is less than perfect, it may be harder to get that loan.  However, it is not impossible.  You have options.

Unsecured vs. Secured Loans

All loans fall into one of two types, regardless of what the loan is for.  The first type, a secured loan, is a loan that uses some type of physical property as collateral.  The most common types of collateral are homes, land and vehicles.  Your credit history matters, but you’re more likely to get approved for this type of loan because there is something of value securing this type of loan.  Should you default on a secured loan, the lender would simply take the collateral property and sell it to recoup their loss.

The second type, the unsecured loan, is harder (but not impossible) for those of us with less than perfect credit to secure.  Should you default on an unsecured loan, the lender will not have anything to repossess to repay the loan. So, if you have poor credit, the lender will be review your application carefully before extending credit.

Unsecured Loans with Poor Credit

Obviously, when you search online, you’ll find many options for different credit levels.  Even if your credit is poor, lenders are still competing for your business – the terms will be different and the interest higher, but there are options. Just be careful, not every loan that you find online is as good as the ad says it is.  Read the fine print.  Verify that the lender actually exists.  Do they have a phone number?  Physical address?  What are the reviews?  Check with the Better Business Bureau before you sign anything.

Carefully Review the Fine Print

Remember, the lender views you as a greater risk if the loan application if for an unsecured loan, so they may be adding other details to the loan to benefit them. The biggest thing that lenders will do to protect them when lending you money if you have bad credit is to raise the interest rate, so be sure that you compare rates before you finalize the loan.  And, most importantly, never get a loan that you’re not going to be able to pay back!  Defaulting on a loan will make your already bad credit score get worse. If you can pay it back and are responsible with your finances going forward, then consider your options and pick the type of loan that works for you.

Putting Your Financial Life Back on Track

Now that the COVID-19 pandemic is beginning to show signs of slowing, things are beginning to open back up, and many of us are going back to work, getting our lives back on track, and starting to plan for the future.  If you’re one of the ones who was furloughed, laid off, or even terminated, your credit may have suffered… So, where do you start at putting your financial life back on track once you have a regular paycheck coming in again?

Obviously, if your credit has taken a hit, the very first thing that you need to do is study your complete credit report.  Credit Bureaus are required by law to supply one credit report per year free of charge. So, by contacting each one separately, you can get your free copy.  This will give you a file number that you can use to dispute anything on your report that you believe is incorrect.  You can also sign up for any of the free services online that help you to monitor your credit score.  (Study each one carefully, figure out which credit bureau they are reporting for, then sign up for three different companies so you can access all three credit bureaus for free!)

Once you have your credit information in hand, study your report very carefully, then consider contacting your creditors directly.  You may find they will be willing to negotiate a settlement of your debt for less than is owed. Don’t wait until your accounts have been turned over for collection by a debt collector. At that point, your creditors have given up.

Charge offs, liens and past due balances on your record within the past 24 months will do the most damage your credit score, so those are the ones you want to concentrate on first. If you have both charged off and collection accounts, but limited funds available, first pay past due balances.  Then, pay the collection agencies that will agree to remove all reference of the delinquency from your recordIf an agency says all they can do is report the debt delinquent, then thank them for their time, but explain you are concentrating your efforts to work with those creditors who will work with you.

If you have older debts on your credit report, the statute of limitations in your state may prevent debt collectors from being able to sue you.  After that, your unpaid debts are considered “time-barred.”  According to the law, a debt collector cannot sue you for not paying a debt that’s time-barred.  Of course, the statute of limitations varies from state to state and for different kinds of debts, so check your state’s laws first.  Also, also under certain circumstances, the debt “clock” can be reset.  This starts the statute of limitations anew, so be very careful.  If you admit to the debt, or even if you pay any amount on the old debt, the clock resets and a new statute of limitations period begins.  That means the collector may be able to sue you to collect the full amount of the debt, which may include additional interest and fees.

A critical factor in negotiating a settlement is a letter from the creditor that explicitly states their agreement to delete the account upon receipt of your payment. This letter will remove the item from your credit report completely, as if it never existed.  Normally, your credit score will quickly rise by 20-30 points once this is removed from your file. Ask that the letter be sent directly to you by fax or email, then personally send it to the Credit Bureaus to ensure that it is processed to your file quickly and accurately.

If your credit cards are behind, most will work with you to pay down your balance, set up a payment plan, maybe lowering the interest rate, or even discounting the amount owed if you agree to pay it all at once.  Remember, you will need the cards to help rebuild your new payment record, so don’t close out the account once you have paid off the old balance.

Whatever you do, keep at it. It takes effort, time, and patience to repair your credit but the results are worth it.  Do not take no for answer, if your initial contact tries to put you off insist on talking with someone who can make the decisions you require.

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.

Financial Solutions for the New Normal

Coffee MugWe are facing financial challenges today as never before and we’re just not sure how we’ll ever be able to dig our way out of it or if we will ever be able to retire.  What does the future hold in the “new normal” that we’re all facing?

Honestly, if this worldwide pandemic has taught us nothing else, it’s this: regardless of your earnings, whether you make $40,000 or $400,000 a year, you’ve got to have a plan for the future!  And I’m not talking about a comfortable retirement, either!  Especially when most of us weren’t even prepared for the financial emergency that this economic shutdown created.  For many of us, it’s going to take a very long time to recover from these weeks or months of staying at home.

 

Exactly what caused us to get in the mess that we’re in?  Why weren’t we saving?  Why do we have so little in retirement?  Where is our emergency fund?

  • Truthfully, we are drowning in debt!  Did you know that the average American citizen carries $168,000 on their home mortgage, $27,000 in car loans, and a whopping $10,000-$15,000 in credit card debt?  And those with student loans?  $48,000.  The interest alone on that much debt is substantial!
  • We’re taxed to death!  The average American citizen pays approximately 24% of their total income in some sort of tax.  That includes income and payroll taxes, sales taxes, property taxes, vehicle taxes, and so on.  And every year, that figure rises!  Just wait until the TRUE cost of this pandemic hits our tax bills!
  • The average American is unable to save at all, but if and when they do, it’s usually only about 2% of their overall gross income.  Imagine 2% of your last paycheck.  How long would it take you to save an emergency fund at that rate?

So, what can we do?  Realistically, if we’ve learned anything at all these past few months, it’s that we really don’t need all those expensive extras in our life!  Take a look at what you used to spend at the coffee shop every morning.  You’ve made your own coffee lately, haven’t you?   What about the gym?  Haven’t you been exercising at home just fine since it’s been closed?  Maybe you really don’t need to eat out as much, either?  Or shop as much?  What else have you learned to do without?  Add it all up… is it $200 a month?  More?  Less?

 

Even if your savings is only $50.00 a month, start saving it now.  Before you get back in the habit of driving through the coffee shop every morning.  Before you abandon your daily walk or run for the gym.  Before you eat out every night instead of cooking at home.

Old habits have been broken.  Embrace the new normal.  Learn from it.  Use it to build a new lifestyle.  One that enables you to build on your financial future, save money, and be better prepared the next time the world comes crashing down around us!

 

What Are You Doing With Your Stimulus Money?

Over the past couple of weeks, Americans have begun to see the economic stimulus checks show up in checking accounts, savings accounts, and now in mailboxes across the country.  Now, obviously, if you are unemployed, laid off, or otherwise furloughed, and haven’t received your first unemployment check, you’re probably going to use the money to pay bills, buy groceries, and just keep your head above water.  But, what if you’re one of the ones who is still working, have started receiving your unemployment (bolstered by the extra $600 weekly federal money), or don’t need the additional money.  What are you doing with your stimulus money?  Are you one of the many who have made the trip to the local home improvement store?  Have you purchased new electronic toys online?

If you haven’t spent your stimulus money, you may want to consider saving as much as possible, and here’s why.

Even though we’ve all been led to believe that the economy will just magically bounce back once we’re allowed to officially reopen those businesses that were closed, the simple truth is that it’s just not going to happen that way.  Already, the Governors of nearly every state are considering “phased” reopening plans, meaning that it’s going to be a slow, steady, uphill battle to dig our way out of the economic hole that this virus has created for us.  Many businesses, large and small, simply may never reopen, and those that do will open with a much lower capacity, and likely, a much smaller staff at first.  And that means that many of us will not be going back to work right away – some of us won’t go back to the same jobs at all.

There’s also the very real possibility that other businesses will ultimate close weeks or even months after the “reopening,” simply because the lower volume of business, coupled with the loss of income over the past two month, will cause those businesses to falter and die long after the pandemic is over.   That’s why, even if your job is totally secure, you may want to hold on to your stimulus money for now – at least until the wrinkles all shake out once everything is open again.

Remember, at this point, nothing is certain.