The Coronavirus crisis is wreaking havoc on the livelihoods of millions of people around the country and the world at large. In the United States, close to 10 million American workers—a record-breaking number—filed unemployment claims in the last two weeks of March 2020.
Amidst the turmoil, it’s understandable that people are wondering how less income or joblessness may affect their credit. A recent Zest AI survey conducted by the Harris Poll reveals that 69% of Americans think their level of income has an impact on their credit scores.
If you’re among those who are worried, then the facts may comfort you. Although an income reduction could certainly have an indirect effect on your credit, losing your job or bringing home less money will not, in and of itself, harm your credit score in any way.
How Income and Employment Factor Into Your Credit Score
Credit-related questions can be complex. Quite often there are no simple answers. If you’re wondering how a specific action will impact your credit score, the answer may be an ambiguous and frustrating, “it depends.”
One reason for the ambiguity is because credit actions can impact the credit scores of different people in different ways. A new negative entry on your credit report might result in a 20 point drop in your credit score. Meanwhile, the same negative entry could cut 40 points from another person’s total score. As a result, it’s no wonder that credit myths abound.
Yet sometimes, the answer to a credit-related question is crystal clear. Such is the case when it comes to income, employment status and your credit score. Credit scoring models do not consider this information when calculating your credit score.
Why Scoring Models Ignore Income and Employment
Credit scoring models, like FICO and VantageScore, consider information that appears on your credit report—nothing more and nothing less. If you haven’t checked your credit reports lately from all three credit bureaus, you may be able to claim free reports from AnnualCreditReport.com. Consumers are entitled to a free credit report from each credit bureau (Equifax, TransUnion, and Experian) once every 12 months.
After you download your credit reports, look them over. You’ll notice that they don’t contain data that pertains to your income. You may find a list of current or former employers on your reports, but you won’t find your current employment status.
Because income metrics and employment statuses are absent from credit reports, credit scoring models ignore them. If an item doesn’t show up on your credit report, it’s irrelevant from a credit scoring perspective.
Furthermore, if income was included on your credit report, it might not affect your credit score as much as you expect. The Federal Reserve released a study in 2018 revealing that income isn’t a strong predictor of credit scores. The study shows that consumers with higher incomes don’t automatically manage their credit in a way that leads to higher credit scores, nor vice versa.
Credit scores measure the risk that a person will become 90 days or more late on a credit obligation during the next 24 months. Earning more money doesn’t automatically make you a good credit risk. Even people with high incomes can have low credit scores if they practice poor credit management habits, like paying bills late or running up high credit utilization ratios on credit cards.
Steps to Take If You Can’t Afford to Pay Your Bills
It’s true that an income reduction or job loss won’t directly affect your credit score. But it would be naive to pretend that suddenly earning less money doesn’t pose a threat to your credit. Reduced income can lead to trouble keeping up with your bills, especially if you already had a high debt-to-income ratio.
With FICO credit scoring models, 35% of your credit score is based on your payment history. So, if you do fall behind on financial obligations, the credit score consequences can potentially be severe.
Are you worried you won’t be able to pay your credit obligations due to the Coronavirus crisis? Here are some tips that might help you.
If You Need Unemployment Benefits, File for Them ASAP
If you lose your job thanks to the COVID-19 pandemic and can’t find a replacement right away, it’s important to file for unemployment benefits ASAP. Often, it can take a few weeks for your first unemployment check to arrive from your state’s unemployment insurance program. So, the sooner you file, the better, especially with many other people applying for unemployment during this time.
On the bright side, the $2 trillion Coronavirus stimulus package, known as the CARES Act, has expanded unemployment benefits. Unemployed workers will receive an extra $600 per week from the federal government on top of regular state unemployment benefits. Additionally, the CARES Act allows self-employed workers, gig workers and freelancers to file for unemployment benefits—three groups that do not traditionally qualify.
Create a New Budget
When your income changes, whether it’s from a reduction in hours or because you filed for unemployment benefits, you will need to make changes to your budget. If you’re bringing home less money than you were before, it’s essential to make spending cuts.
Lowering your expenses could be a smart move even if your income hasn’t changed. You can use any funds you free up to start or grow an emergency fund that can help you better prepare for future uncertainties.
Research New Income Opportunities and Relief Options
One of the best ways to address an income shortfall is to find other options to inject extra cash back into your budget. Although many businesses are currently downsizing or shuttering altogether, there are a number of industries in desperate need of workers during the pandemic. Here’s a guide to help you find companies that are still hiring in the midst of COVID-19.
There are also a number of relief options available, courtesy of the federal government and other organizations. For example, the federal government will soon be sending out stimulus checks to millions of Americans, courtesy of the CARES Act. Small business owners, self proprietors, and contract workers may also be able to take advantage of other provisions in the CARES Act that could help them stay financially afloat.
Ask Your Lender for an Accommodation
If you’re at your wits’ end and can’t find a way to keep up with all of your bills during the pandemic, your lender may be willing to help. Lenders and creditors from a variety of industries are stepping up to offer relief, such as:
It’s best to contact the companies you do business with before you miss a payment. In the case of federal student loans and federally-backed mortgages, relief options are built into the CARES Act. However, you may still need to contact your lender to request to activate relief options, like payment deferment. With other banks, credit card issuers and lenders, you will need to reach out proactively to see what types of hardship options may be available.
The CARES Act also includes language that temporarily amends the Fair Credit Reporting Act (FCRA). If you reach an accommodation with your lender during the pandemic, the lender must continue to report your account as current to the credit reporting agencies (assuming you weren’t already past-due on your payments).
Other Ways Income and Employment Status Can Affect You
You probably don’t work hard to maintain a good credit score just for bragging rights. A solid credit rating matters because of the impact your credit can have on your overall financial wellbeing.
A good credit score can make it easier to qualify for new loans and credit cards when you need them. Clean credit reports might give you an edge when you apply for a new job or promotion. Higher scores may also save you money by helping you secure lower interest rates and even insurance premium discounts.
Of course, your credit isn’t the only factor that lenders consider. When you apply for financing, lenders will evaluate both your creditworthiness and your capacity. Creditworthiness measures the likelihood that you’ll make your payments on time. Capacity tells lenders whether you can afford the financing you’re seeking, based on your income and debt obligations.
Even with stellar credit scores, your application might be denied if a lender doesn’t feel confident that you can afford the loan or credit card.
Surviving the Crisis
Losing your job, even if you did nothing wrong, can be an emotional and stressful experience. Yet bad credit doesn’t have to be a side effect of unemployment or income reduction during the COVID-19 pandemic. As long as you proactively communicate with your creditors and you’re careful with the money you do have (unemployment benefits, stimulus check, emergency fund, etc.), it is possible to emerge on the other side of this storm with a good credit rating still intact.
Is There a Difference Between No Credit and Bad Credit?
The short answer is yes, and understanding the difference could be instrumental in getting better credit.
No credit and bad credit often get grouped together. It’s understandable why, as they both sound similar enough. And if you have either, the next step forward is to focus on improving your credit.
The two situations aren’t the same, though. It’s important to know the difference, because the right way to build your credit often depends on whether you have no credit history or bad credit.
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The difference between no credit and bad credit
Having no credit means that there’s not enough information on your credit file to calculate a credit score for you. It’s also known as being credit invisible. Sadly, this is an issue that affects millions of Americans.
There aren’t any problems on your credit file; the credit bureaus just don’t have enough data on you. That means when a lender or any other third party checks your credit, there’s nothing to go on.
Meanwhile, “bad credit” is a common term used to describe a low credit score. That low score is because of negative items on your credit file, such as not paying your credit card bill.
When you have no credit, the solution is to build your credit. When you have a low credit score, the solution is to rebuild your credit. Now, let’s look at how you can do each one.
How to build credit for the first time
Here’s the simplest way to build credit:
- Open a credit card.
- Use the credit card for at least one purchase per month.
- Always pay your credit card bill on time and in full.
It’s that easy; that’s all you need to do to get a good credit score. When you use a credit card and pay the bill on time, you establish a positive payment history. That’s the biggest credit scoring criteria.
The tricky part when you have no credit is finding a credit card you can qualify for. Secured credit cards are one of the most common options for consumers in this situation. You pay a security deposit for this type of card, so it’s possible to open a secured card even if you have no credit.
If you’re in college, credit cards for students are available. These are often an option for applicants without any credit history.
How to rebuild a low credit score
It’s a little more complicated to rebuild your credit. First, you need to find out what negative items are affecting your credit score. Here’s how to start:
- Use an online credit score tool to check your score and learn about any items damaging your credit. If you have a credit card, there may be a credit score tool in your online account. If not, there are plenty of free ways to get your credit score.
- Request your credit report from the three consumer credit bureaus (Equifax, Experian, and TransUnion). You can pull a free annual credit report from each bureau, and through April 2022, you can get free weekly credit reports. Your credit report will show you exactly what’s affecting your credit.
Once you know what’s affecting your credit, you can work on correcting it. Below are a few of the most common issues and how to fix them.
Problems with your payment history
This includes anything related to not paying a bill on time, from late payments to having accounts go to collections.
The first step is catching up on your payments. If you can’t pay in full, contact your creditors and see if you can set up a payment plan with them. They may be willing to work with you if that means you’ll be making regular payments.
Next is rebuilding your payment history. The easiest option is to use a credit card at least once per month and pay in full by the due date. Why do you need to use a credit card? Credit card companies report on-time payments to the credit bureaus, which helps your credit score. With other types of bills, your on-time payments typically don’t get reported to the credit bureaus. That means you may not be able to improve your payment history with rent, utilities, or other monthly bills.
If you already have credit cards, you can continue using them to rebuild your payment history. If you don’t, look for secured credit cards and apply for one you like.
Using too much of your credit
A big factor in your credit score is your credit utilization ratio — your credit card balances divided by your credit limits. If this number gets too high, it can lower your credit score. The standard recommendation is a credit utilization ratio of under 30%.
Let’s say you have one credit card with a $4,000 balance and a $5,000 credit limit. That would put your credit utilization at 80% ($4,000 divided by $5,000 is 80%), a very high number that would decrease your credit score.
Fortunately, only your current credit utilization matters. Once you pay down your credit card balance, your credit score will bounce back.
Errors on your credit history
A low credit score may be due to an error and not any action on your part. This is why it’s so important to pull your credit reports from each credit bureau. By reviewing those, you can see if there are any mistakes.
If there are errors on your credit report, you can go to the credit bureau’s website to dispute them online and get them removed.
A low credit score and a nonexistent credit score are both things you can change. After you determine exactly what the issue is, you’ll be able to choose the best solution to fix it.
‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic
It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.
Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.
To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.
“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”
Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.
Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.
She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.
Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.
“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”
Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.
“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”
In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.
Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.
Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.
“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”
Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.
As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.
So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.
The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.
“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”
Columbus Mattress Wholesale moves to newer, larger Gahanna store
More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable price.
Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.
They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches.
But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of helping low-income consumers secure mattresses and other bedtime products.
“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.
Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income.
Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.
Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.
Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.
Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.
Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus.
Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell.
She said a big mission for herself and Robbins, beyond doing business, is aiding the community.
“We’ve seen a lot of people struggle,” Clark said.
Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.
She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.
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