This article was originally posted at Washington's Top News by U.S. News and World Report, and can be accessed here.
If you’re one of the 800,000 federal employees who are not getting paid during the government shutdown, you’re in a tough spot, for sure.
Most likely, you’ve morphed into survival mode, which may or may not include thinking about your credit score. I totally get that. But what if I told you it’s possible to get through this with an (almost) intact credit score?This will be tougher if you don’t have an emergency fund, but at the very least, there are ways to get through this with as little damage to your score as possible.
So, let’s talk about a few common money missteps that consumers often make when facing a financial emergency. Knowing how your financial decisions will impact your score will help you make the best choice for your situation.
You Missed Your Credit Card Payment
Credit cards are unsecured loans, and that’s the good news. No one can come and repossess your car or take back the pair of jeans you purchased.
But if you miss a payment, a lot of other terrible things can happen to your credit score. Lenders won’t report your late payment to the credit bureaus until you’re at least 30 days past due. But beyond that, a missed payment can lop off 100 points from your FICO score. Your payment history is 35 percent of your FICO score, so that’s why the impact is so big.
How to fix it: Fortunately, some credit card issuers are waiving late fees for those impacted by the shutdown. Check with your issuer and explain that you’re experiencing the financial fallout from the government shutdown.
If your credit card company isn’t offering relief and you’re less than 30 days late, your next move is to ask the issuer to (please) remove the late fee from your statement. Don’t put off asking for help, because once you’re more than 30 days late, the issuer can report your tardiness to the credit bureaus. The result will be a crashed credit score.
But even if the missed payment has already been reported, you can take steps to prevent this from getting worse. And, believe me, it gets much worse from here. Each month brings you closer to being labeled a “collections account.”
Call your credit card company and ask to speak with the hardship department. Explain your situation and ask if you can get help. You might get a lower minimum monthly payment or be given more time to make your next payment.
These programs are designed to be short-term solutions, so your situation fits the bill. Do this now before you end up 60 days late.
You Used Your Credit Cards to Pay for Everything
Now, we’re looking at a scenario where your credit cards are maxed out. When you use more than 30 percent of your available credit, it dings your score. You have a credit utilization ratio, which is the amount of credit you’ve used compared with the amount of credit you have available.
Your credit utilization comprises 30 percent of your FICO score, so that’s why your score drops when you have higher balances. As your credit utilization goes up, your score goes down.
How to fix it: You were probably trying to avoid getting a personal loan or raiding your retirement savings. But now it’s time to look at other options. Consider some of the zero percent personal loans that many banks are offering to those who have temporarily lost their salaries.
When the government is back in business, your score will rebound as you pay off the debt. It takes time, so be patient. When your credit score is in a good place again, check out balance transfer credit cards that offer a zero percent introductory APR. The interest-free rate is usually available between 12 and 21 months.
During that time, you make monthly payments on your balance, but you don’t have to pay interest. A debt consolidation loan with a low interest rate is also a possibility if you don’t qualify for a balance transfer credit card.
One bright spot? If you’re using a rewards card for everything, you might be piling up a lot of points. Check out the rewards program for your card. You might have enough points for a statement credit or for a gift card that addresses a current need you have.
Your mortgage is a secured loan and your home is collateral, so this is a big one. Most mortgage payments come with a grace period, and it’s usually around 15 days. After 15 days, you’ll probably be charged a late fee, which will be a percentage of your monthly payment. Depending on the size of your mortgage, this fee could be an extra dent in your budget.
This is where the damage to your score occurs. If your late payment stretches beyond 30 days, you’re looking at around a 100-point drop in your credit score. The higher your credit score, the bigger the drop. I know that sounds unfair. But this is the reality we’re stuck with right now.
How to fix it: Again, get on the phone, preferably before you hit the 15-day mark. Explain your shutdown-induced financial issue and see if you can get the late fee removed. If it’s already past 30 days and your late status is reported to the bureaus, then making that call is still the way to go.
The worst thing to do is to ignore it. After you’re 120 days late, your lender might start the foreclosure process. Make the call today and negotiate a way to avoid foreclosure.
You Can’t Pay Your Medical Bills
This is tough to face, because the shutdown isn’t your fault and getting sick wasn’t a choice, either. But you still have to take charge and deal with this.
Before you panic and use credit cards or borrow from your retirement savings, take a deep breath and look at the options for paying your medical bills.
How to fix it: Make a list of your creditors and start making calls. Again, state your status as a furloughed government employee so they understand your dilemma. Hospitals often offer zero percent interest payment plans, so see if you can negotiate your way to a monthly payment you can handle.
This might be a reduction in the total amount you owe or a low monthly payment plan. Doctors also may offer financial assistance in the form of discounts or low monthly payments.
The main thing is to act now. According to a 2018 survey by Consumer Reports, almost 20 percent of Americans said their credit scores have gone down due to unpaid medical bills. If you don’t pay and then don’t call and ask for help, your bill will be reported as delinquent to the credit bureaus.
Thankfully, new regulations do make it more difficult for unpaid medical bills to land on your credit report. As of September 2017, the three major credit bureaus are required to wait 180 days before they can put your unpaid medical bill on your credit report.
What to Do When the Government Shutdown Is Over
I have two words for you; emergency fund.
Once the shutdown dust settles, make your emergency fund a priority. You need to be able to cover your bare necessities for at least six months. Does that sound impossible? Break it down into doable increments.
Start with $50 a month, or even $25, and set quarterly goals. Fortunately, there are many interest-free loans out there to help you right now. But the next time a potential financial disaster happens, if you have an emergency fund, the experience will be less stressful and less costly.
So get ready to save money this year when you get your paycheck again. Interest rates are going up, which means better rates for a savings account. Check with your bank, but also explore online savings accounts, which are offering rates that exceed 2 percent.
Hopefully, this will end soon and you can start getting your money, and especially your credit, back on track.