Protecting your credit score during Covid-19

Keeping up with credit card bills will remain a key priority for many Canadians as the economy continues to reel from the financial ramifications of the pandemic and the months-long lockdown. While some provinces are gradually reopening the economy, the road to recovery is likely to be a sustained process.

Blair Mantin, a licensed insolvency trustee and senior vice president of Sands & Associates, said he expects to see a sustained and significant increase in defaults on credit cards and consumer loans in July and August. 

“That is when the earliest round of the Canada Emergency Response Benefit (CERB) payments will cease, and individuals may be forced to make difficult choices about what payments they are able to make,” said Mantin. 

Overall non-mortgage delinquency rates in Q1 2020 rose 39 basis points to 5.75% from the previous quarter, the highest since 2015, according to a revised credit forecast from TransUnion Canada. A higher cost of debt, plummeting oil prices and a cooling economy likely fueled the increase. Canada’s overall non-mortgage delinquency is projected to peak at 6.9% at the end of Q3 2020 before dropping back down to 6% at the end of Q1 2021. 

“Elevated unemployment and its effect on consumers’ income and ability to pay debt obligations is a primary driver of increased delinquency,” Matt Fabian, TransUnion’s director of financial services research and consulting, said in the statement.

Canada’s unemployment rate has been climbing steadily. Before the COVID-19 economic shutdown, the unemployment rate in February was 5.6%. That number rose to 7.8% in March and 13% in April, according to Statistics Canada’s Labour Force Survey for the month of May. 
 
For people who use debt to survive during the pandemic, rising debt levels may hurt their credit score, said Douglas Hoyes, a licensed insolvency trustee with Hoyes, Michalos & Associates Inc.

Apart from suffering a hit to their credit scores, people in debt will also receive collection calls from an increasing number of parties. 

“After three months of delinquency, banks typically give up on preserving a positive customer relationship and send the file to a third-party collection agent, who will often take a harsher tone of communications (written and oral) than the bank would be comfortable doing,” said Mantin.

The factors that affect credit score are payment history, credit utilization, length of credit history, types of current credit and new credit applications.

Missed payment is a major factor. “You want to be extra careful when due dates are,” Hoyes said. “You can seriously harm you credit score by being late with small bills like utilities and cell phone bills.”

Although being laid off will not have an impact on credit scores since employers do not report job status to credit-reporting agencies, a reduction in income resulting in missed payments will. So will indicating one’s unemployment status when applying for new credit.

Getting financial aid from the government, such as CERB, and payment deferrals that are properly documented will not affect credit scores. Hoyes recommends that cardholders obtain a written confirmation of payment deferrals. 

For people struggling with debt, payment deferral is an option but not necessarily the best one. “Most lenders have continued to charge interest on outstanding balances, but have given a period of a few months where they do not require minimum payments to be made on these balances,” said Mantin.

He recommends low-rate credit cards as an alternative. “They typically do not advertise these cards heavily, but taking a card from a 19.99% balance to something closer to 10% to 12% on many low-rate cards can be a huge savings and can allow someone to better manage a debt,” said Mantin.