Millions of Americans are struggling to pay off their loans during the pandemic. While the federal government allows for some relief, consumers should still be vigilantly monitoring their credit.
Under the federal CARES Act, consumers affected by the pandemic can get some relief in paying their debts—without damaging their credit. But one financial expert warns that people should not assume this will happen automatically. In many cases, consumers need to ask for it.
“Whether it be a mortgage or a car payment, or credit cards, you must notify them that you are in trouble, asking for some leniency … by extending the timeframe they can pay it back, or lowering the payments,” said Mark Charnet, founder and CEO of the New Jersey-based American Prosperity Group.
How consumers can get the relief depends on what type of loans they owe. For example, for federal-backed mortgages, borrowers need to request the relief, while for federal-backed student loans, payments should be automatically suspended. But that’s not always the case.
In May, a student loan provider was sued in California because it allegedly reported borrowers with deferred payments, affecting nearly 5 million borrowers and potentially lowering their credit scores
Charnet says consumers should be proactive and talk to their lenders first before any problem is reported to the credit bureaus.
“Certain banks that work with the government, like lenders for mortgages, are obligated not to report—only when asked. They will not do it voluntarily,” he said. “It’s vitally important that consumers are proactive, not reactive to the potential bad problems that they may be facing due to losing their jobs or having less income.”
This applies to mortgages, auto loans, credit card debts, or even medical bills. But borrowers need to pay the debt after the agreed-upon accommodation period is over.
According to experts, credit scores can drop as much as 100 points even with one missed payment. And negative information can stay on credit reports for as long as 7 years.
Charnet said he helped with a case where a woman had her credit card application denied because she didn’t pay a few dollars of interest. She had paid off all the monthly payment, but not the interest, which was less than $5 because she says she never got a bill. After clearing up that with the three credit bureaus, her score went back up to around 800.
With bad credit, the impact to consumers goes far beyond not getting a loan, Charnet said. “It could hurt your chances for employment, your prospective employers will look at your credit profile, it might hurt your chances of getting a good auto insurance rate,” he added.
He said someone he knows someone who was terminated by his employer, an automaker, where he had worked for 20 years, when the company found out he lied about his education history while doing a background check for a potential promotion.
Charnet recommends consumers stay updated about their credit using apps like Credit Karma.