Disasters and Your Credit Score – How to Be Prepared

How can natural or declared disasters affect your credit?

A natural or declared disaster likely won’t directly affect your credit; however, there are a few ways it can indirectly affect it both positively and negatively:

If you have to take time off work (due to injury or other reason), are laid off or have your wages cut, or otherwise can’t work, your reduced income may make it more difficult to afford monthly payments including credit card bills, loan payments, or mortgage/rent payments. Payment history makes up 35% of your credit score, and missing payments can have a significant negative impact.

Whether you’re facing reduced/eliminated wages or simply need more to make ends meet or cover extra expenses, you may turn to credit cards. This could include paying your monthly bills or covering an insurance deductible, repairs, or even medical bills. Using a credit card gives you quick access to cash, but it also increases your credit utilization ratio. Typically, a ratio of 30% or more can decrease your score.

Additionally, you may find it more difficult to pay off your bills each month, and carrying a balance can increase your debt-to-income ratio, which can impact your score.

You may find yourself in a situation where you need to take out a personal loan or apply for another credit card to cover expenses such as medical bills, home repairs, or even living expenses. Applying for a line of credit triggers a hard credit inquiry, which can temporarily decrease your score by a few points. As long as you make your payments on time each month you may see an increase in your score; however, missed payments can lower your score.

How to prepare your credit for a disaster

You can’t always know when disaster will strike, but preparing for it just in case can help protect you, your finances, and your credit. It can also help you recover faster. There are primarily two things that will help your credit most when it comes to disaster preparation: staying on top of your credit and developing a solid emergency fund.

1. Check your credit

Keep an eye on your credit score and monitor your credit reports regularly. You can get one free credit report each year from each of the credit bureaus (Experian, Equifax, TransUnion) and you can request them once per year from AnnualCreditReport.com

When you check your report, make sure all of the information is up-to-date and accurate. If you see any mistakes or errors, work to correct or dispute them. If your score needs improvement, take steps to do so now so it’s in a better place should disaster strike. A better score can give you more options if you suddenly need to borrow money.

It’s also a good idea to keep a paper copy of your report, especially the section listing the accounts and creditors’ contact information, with your emergency supplies.

2. Create an emergency fund

Building an emergency fund takes time, but it can help ensure you have the funds you need should you face unexpected job loss or another hit to your finances. Experts recommend having at least three to six months’ worth of expenses set aside, giving you a cushion should you face job loss or be unable to work. Or, you can use those funds to cover repairs, medical bills, or other expenses due to the disaster.

It can also be helpful to have quick access to credit, meaning you can use an existing credit card(s) should you need to. Keep your balances low, and consider asking for a higher credit limit so you have access to more credit if necessary.

Protecting your credit during a disaster

If you’re facing a disaster, you’ll want to be as proactive as possible to protect your credit and finances:

1. Seek disaster aid

Look into any state or federal disaster aid you may qualify for. Depending on your situation, recovery can take a long time and/or cost more than you initially thought, and having that assistance can make a huge difference. However, the window to apply for aid is typically small, so you’ll want to act quickly.

Not applying for disaster aid can put a strain on your finances and therefore, on your credit.

2. Be proactive about bills

First, be strategic in paying your bills. For example, don’t pay off your credit card in full each month if that means you won’t be able to afford your rent. Instead, make minimum payments until you’re able to recover.

Next, ask your creditors for assistance, such as suspended payments, reduced minimum payments, or a higher credit limit. Explain your situation and they may be able to assist. Just make sure you get any agreement in writing.

The most important thing is that you do your best to avoid missing payments altogether. This can have a serious negative impact on your credit score which can be difficult to recover from.

3. Be wary of fraud

Unfortunately, times of crisis are also times fraudsters and scammers work hard to take advantage of people.

If you receive an email or phone call from someone saying they are a creditor assisting you, don’t respond or give them any information. Instead, contact the creditor directly using trustworthy, accurate information (such as contact information on their website or your credit report).

Never provide any personal or financial information over the phone unless you completely trust who you are talking to or you initiated the conversation.

If you suspect identity theft or fraud, place a freeze or fraud alert on your credit report.

Watch your credit during recovery

As you recover from a disaster, it’s important to keep an eye on your credit to make sure there are no errors or mistakes reported. This includes missed payments that were reported when they shouldn’t have been. If this happens, contact the creditor or file a dispute.

Additionally, continue monitoring to ensure there are no fraudulent actions reported or signs of identity theft.

Finally, check for “affected by a natural or declared disaster” codes on your reports. While FICO doesn’t consider these codes when calculating your score, VantageScore does disregard negative information from accounts with that code.

However, be cautious about this as well as having this code on your report could impact financing in the future. You can always ask your lender, credit card issuer, or credit bureaus to remove the code if it no longer applies.

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