Your money — and specifically your credit — have both been major players in this global pandemic. We’ve seen how the coronavirus has upended the economy, causing widespread joblessness and a volatile stock market, which has left many in an uncertain financial situation. Due to a loss of income and little in savings accounts, Americans are relying on their credit cards more than ever.
But what happens when your credit card “safety net” is pulled out from under you? CreditCards.com analyst Ted Rossman says relying on a credit card as an emergency fund is “dangerous,” and we’re now all seeing exactly why. Credit card issuers are starting to cancel credit cards and cut credit limits for riskier customers without their permission.
Why? Well, it’s time for a history lesson. During the Great Recession, Rossman notes, 10% of all credit card bills went unpaid, leaving the banks in a bad position. This time around, they’re scared, so they’re trying to get out ahead of the game by closing out lines of credit — or at least minimizing the amount of credit — for riskier customers. They’re hoping that this means they can get paid when they need to.
So, how do you know if you’re at risk of having your credit cancelled? There are a few telltale signs. Dormant credit cards, which haven’t been used in 6-12 months, are likely to be cancelled, says Rossman. This card isn’t making any money for the issuer, but it poses a risk if you were to suddenly run up the balance. To ensure it stays in your rotation, make a small purchase with that card now, and then pay it off. This shows the bank that not only are you using that card, but you’re using it responsibly.
If you carry a riskier credit portfolio — a low credit score along with a history of late payments — you’re likely to see a cut in your credit limit. This lessens the risk of a bank or credit card company having you as a customer.
Credit cards are not the only lines of credit with higher standards right now. Taking out a mortgage now requires a higher credit score than it might have before, and personal loans are only going to the most trustworthy of customers. All of these measures are being put in place as a form of risk management for banks, Rossman says. There are programs out there for you though, if you’re struggling.
Here’s what you can do if you find yourself needing more than the credit card companies are offering to you right now.
Start by asking for help.
Many people are struggling to make payments because of unemployment or a cut in income. If you’re honest about your situation, your credit card company will likely be willing to help, Rossman says. Major companies have put hardship programs into place that give relief to those who need it. You can expect some combination of approval for a deferred payment, a lower interest rate, and fees waived, depending on your issuer and your specific situation.
Address the problem.
Banks and credit card companies typically respond well to customers who admit their faults, Rossman says. When you run into trouble, reach out to the bank or company in question and explain what happened. Then ask if there is anything they can do to help out. They’d much rather lend a hand (and money) to someone looking to change their bad habits than someone they have to chase down for a payment.
If you can’t get approved for a loan, you have other options. Rossman suggests looking into hybrid credit card and personal loan cards that many major banks and credit unions offer. Some programs offer an upfront “loan” or credit limit that you can opt to repay over a decided set of months. These typically have a lower interest rate, too. Check with your issuer to see what they have available for you.
Keep up with your credit report.
For the next year, you can get a free credit report from all three major credit bureaus every week. While you might not need to check it that often, Rossman says, you should definitely keep up with your credit report more frequently now that you have the opportunity. Stick with once a month checkups to make sure everything is in place.
Don’t attack debt.
Rossman notes that although using a credit card as your emergency savings is risky, and he typically recommends using any extra income (like a tax refund) to pay down any existing debt, he understands that the situation we’re in now is very different. In that case, he reminds us to use that extra cash for things you really need right now, and to forget about paying off debts for the time being. “If you have to carry credit card debt right now in order to stay afloat, that’s okay,” he says.
More on HerMoney:
- Your Many Credit Scores and What They Mean to You
- How To Pay Off Credit Card Debt
- 4 Easy Hacks to Increase Your Credit Score
- Coronavirus Advice: The Dos and Don’ts of Credit Right Now
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