Before the $2 trillion stimulus package known as the CARES Act was passed March 27, 2020, lawmakers attempted to include legislation instructing credit reporting agencies (CRAs) to pause reporting negative credit information for four months.
Ultimately the legislation did not make it into the final bill. For now, creditors are pushing to take care of the issue without legislative intervention.
One way they plan to do that is by applying a natural disaster code to information reported to CRAs pertaining to borrowers financially impacted by the coronavirus pandemic.
There are a few important things to know about how natural disaster codes work:
- It is up to the consumer to notify a lender they are impacted by this public health emergency.
- It is up to the lender to apply the code when reporting information to the CRAs and lift the code when the disaster is considered over.
- Lenders are given information about the available options for reporting information about affected accounts. However, they are not required to follow certain reporting protocols.
So what happens if a lender reports information using this natural disaster code?
In the case of VantageScore, a credit scoring company jointly owned by the three major credit bureaus (Experian, Equifax and TransUnion), “When accounts are reported with a natural disaster reporting code, information that would normally have a negative impact on a consumer’s credit history is instead “set to neutral” and thus is not included when calculating the consumer’s credit score. Positive information already in the file, such as the account’s on-time payment history, is retained.”
[If you’re concerned about your credit because of the pandemic or any other reason, you can use Upturn for free to see what’s on your Transunion credit report, and identify and address any errors you find.]
On the other hand, credit scoring company FICO considers how account information is reported by the lender. Per FICO, “Placing borrowers in a temporary deferred payment plan or in forbearance, along with reporting an account status as “current” instead of as “delinquent” will permanently ensure that a borrower’s FICO® Score won’t be impacted by late payments related to the effects of the COVID-19 outbreak.”
Read on for more information about how creditors and lenders are treating certain types of accounts and what that may mean for your credit score.
Under the recently enacted CARES Act, federally backed mortgages (e.g., FHA and VA loans) are eligible for loan forbearance for up to 12 months. This means borrowers who are experiencing financial hardship due to lost wages do not have to make mortgage payments and will not be charged fees, penalties, or interest they wouldn’t have been charged had payments been made in full. They will also not be reported to credit reporting agencies for failure to pay.
So, with all that in mind, here are some questions consumers are likely to have relating to the coronavirus crisis and credit.
I have a conventional loan and will be unable to make my mortgage payments in full. What are my options?
Private lenders are not under specific direction from the federal government, so the relief they offer will vary. However, many are offering to place loans in forbearance or deferment.
It’s important to note these “skipped” payments will have to be made up in some way or another. While some lenders will add them to the backend of the loan, others may request all payments in full at the end of the forbearance period. Make sure to check with your lender before moving forward with this step.
I plan to take advantage of my mortgage lender’s forbearance program. Is this reported to the credit reporting agencies?
Yes, this information may be reported. However, according to FICO, “The CARES Act leverages the industry standard of reporting consumers as “current” or at the same payments status as when they enter the plan.”
This means your account should not be reported as delinquent if you are in a forbearance program.
I have a federally backed mortgage but my loan was already in default before this crisis occurred. Will my credit be protected from negative marks or am I ineligible for help?
First and foremost, the CARES Act will suspend foreclosures for at least 60 days for federal loans and loans backed by Fannie Mae and Freddie Mac. You can also still receive help through loan forbearance, however, the default that occurred prior to the disaster will be used in calculating your credit score.
- Guide to coronavirus mortgage relief options via CFPB
- Mortgage Relief Tracker: Coronavirus (COVID-19) Relief for Homeowners via Forbes
Under the CARES Act, payments on federal student loans will be automatically deferred until Sept. 30, 2020, with interest rates set at 0% (with the exclusion of Perkins loans and Federal Family Education Loans). This mandate does not apply to private student loans. Borrowers should make sure to confirm their loans are covered before stopping payment.
I plan to take advantage of the federal student loan deferral period and stop payment. How will this period of non-payment impact my credit score?
These payments aren’t considered missed payments but deferred payments, which have no negative impact on your score.
My federal student loans are already in default. Will I be eligible for deferral and how will collections be treated during this time?
Under the CARES Act, all collections activity on federal student loans will be paused until Sept. 30, 2020 (including garnishment of wages, Social Security benefits, and tax refunds). While your credit score will not be negatively impacted by deferred payments during this time, any default prior to March 13, 2020, will still be factored into your score.
I have private student loans and will be unable to make my payments. Is there any relief?
Unfortunately, there is no federally mandated relief for borrowers with private student loans. However, your lender may offer forbearance options that would temporarily suspend your payments. Unlike deferment, interest may continue to accrue, but your credit score would not be negatively impacted.
- What you need to know about student loans and the coronavirus pandemic via CFPB
- Student Loan Hero Coronavirus Information Center via Student Loan Hero
While the federal government took action on federally backed student loans and mortgages, credit card companies are making their own rules when it comes to offering relief. However, many are waiving fees and allowing deferred payments based on customer need.
My credit card company has agreed to temporarily defer my payments. How are these missed payments reported and how will they impact my credit score?
These payments aren’t considered missed payments but deferred payments, which do not have a negative impact on your score.
If my credit card company does not agree to defer my payments, can a note be added to my credit report stating why my payment history has been negatively impacted?
According to VantageScore, this is where the disaster code comes into play. “The Consumer Data Industry Association (CDIA) guidance is that the payments are also reported as deferred, and missed payments will not impact a person’s VantageScore.”
FICO scores may still be impacted by these missed payments if they are not reported as deferred. However, it is possible to add a consumer statement to your credit report indicating you have been impacted by coronavirus. This statement doesn’t positively or negatively impact your credit score, but it can show a more complete picture to future lenders.
I may be forced to rely more heavily on credit cards during this time. Can I keep my credit from being negatively impacted by a higher-than-normal credit utilization?
The first step is to contact your lender. In addition to potentially offering account forbearance, the reporting code discussed above can lessen the impact that credit utilization has on your VantageScore during this time.
With millions of people currently out of work, losing health insurance could become a common issue for many Americans. While paid sick leave was approved for some workers, medical debt and the impact on credit has not been specifically addressed by legislation.
I have recently lost my health insurance and I’m worried seeking medical treatment for the coronavirus will negatively impact my credit if I’m unable to pay out of pocket. Will medical debt that occurs as a result of this pandemic be treated any differently than medical debt acquired under different circumstances?
According to VantageScore, it’s important to note that medical debt only impacts your credit once it’s turned over to a third party collection agency. After being turned over, there is a 180 day grace period before the information is reported to the CRAs. In addition, the size of the collection amount matters — smaller debts have less of an impact than larger debts.
There is currently no indication medical debt related to coronavirus will be treated differently. However, under the Families First Coronavirus Response Act, several states are expanding Medicaid coverage to help those impacted by the pandemic — see if your state is one of them. If your income is higher than the Medicaid threshold, you may be able to purchase a plan on the Affordable Care Act marketplace during a special open enrollment period.
- Private Health Coverage of COVID-19: Key Facts and Issues via Kaiser Family Foundation
- How uninsured patients can get help during COVID-19 pandemic via PBS
- How to Get Health Insurance if You’re Worried About Coronavirus or Have Lost Your Job via The New York Times
Credit Scores: A three digit number accessible to lenders, credit card companies, and other interested parties that is intended to show how responsible you are with handling debt and other payments. You have multiple credit scores that are compiled using information from your credit reports. Your credit reports do not show your credit score.
Credit Reports: Documents listing your past and current reported accounts, along with information about those accounts — like payment history, account balance, and credit limit. This information is reported to the three credit reporting agencies by creditors (like lenders and credit card companies). You have three separate credit reports (one for each of the three CRAs).
Forbearance: An agreement between a lender and borrower to temporarily suspend or reduce payments. Generally, interest continues to accrue during this time and the missed or reduced payments are due at the end of this period (unless another plan is set in place).
Deferment: An agreement between a lender and borrower to temporarily suspend payments – and potentially interest accrual as well. Missed payments may be added to the end of a loan or paid in an agreed upon interval after the deferment is over.