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Your credit score is one of your most important assets and having a good credit score will help your finances in a variety of ways. — from better access to credit to lower interest rates.
The FICO® score typically ranges from 300 to 850 and is calculated based on a variety of factors, including your payment history and the amount of available credit you use.
Contingency planning will help you make sure you have a system in place to protect your credit history should something happen.
How Emergencies Affect Your Credit Score
There are many different versions of FICO credit scores used by lenders (including the UltraFICO™ Score), but emergencies affect them in the same way.
Unexpected expenses
In many cases, an emergency situation can lead to unexpected expenses. This can include things like a natural disaster forcing you to leave home for an extended period of time, or unexpected repairs to your car or home. You may also lose your job or reduce your hours of work, which could lead to an unexpected shortage of funds.
In emergencies, these costs may be covered by credit card, which may mean that you may not be able to pay your credit card bill in full on time.
“Using credit on your credit card [will] percentage increases dramatically,” says Katherine Collins Alford, co-founder of Millennial Homeowner. “This can cause your score to drop because your credit usage, that is, the amount of credit you use in relation to the amount of credit given to you by the lender, is 30 percent of your credit score.”
Missed payments
Another way an emergency can affect your credit score is if you miss a payment on one of your credit cards, loans, or other debts. One of the most important factors in calculating your credit score is how you meet your existing debt obligations. Lenders want to know how reliable you are in fulfilling your loan obligations, and a credit score is one way to quantify this information.
Depending on your emergency situation, there may be several reasons why you may miss a payment. For example, you or someone in your family may be sick and your payment may be late. Or you may simply not have enough money to make any payment at all. Either way, it’s undeniable that a missed payment can drastically lower your credit score.
How to protect your credit score from emergencies
The best time to plan for emergency situations is before an emergency occurs.
“You protect by planning and anticipating emergencies,” says Walter Russell, veteran financial advisor and CEO of Russell and Company. “You can’t plan for every emergency, but your job is to try to reduce the risk.”
Here are a few things you can do to protect your credit score from emergencies:
Create an emergency fund
Building an emergency fund is one of the best things you can do to protect yourself and your family from unexpected expenses.
The amount of money you put into an emergency fund depends on personal preference, but many experts recommend spending three to six months.
If this seems like an insurmountable goal, start building an emergency fund with what you can afford. One way to get started is to subtract certain recurring expenses (like a gym membership you rarely use, daily Starbucks trips, or eating out) and put that money into a separate savings account. Continue by adding any extra money during the year (such as performance bonuses, tax refunds, and money generated from yard sales). Soon you will have a decent reserve fund to help protect you when things go wrong.
Set payments to auto pay
Another strategy to help protect your credit score when something unforeseen happens is to make sure your accounts have at least the minimum amount set for automatic credit card or loan payments. That way, even if you have a major medical event or other catastrophic disaster, you won’t miss a payment. — maintaining your credit report and credit score in the process.
Ask your lender for a payment placement plan
While it is true that lenders can offer discounts in the event of an emergency, the scoring formulas do not view financial situations due to COVID-19 or other emergencies as negative in and of themselves. But there are other ways to alleviate these situations.
“Contact your lender to let them know your circumstances,” says Tom Quinn, vice president of Scores at FICO. “Many lenders want to keep you as a client and will work with you to try and temporarily alleviate the pain of the situation you find yourself in.”
Most lenders have programs to deal with borrowers in need, whether it’s a medical emergency, job loss, or other unforeseen situation. If you contact your lender and keep them informed of your situation, most lenders will try to accommodate you. Just make sure you keep the lines of communication open.
Apply for a reserve credit card
Quinn recommends applying for a backup credit card as a possible contingency mitigation strategy.
“It’s not a bad idea to potentially apply and collect additional credit cards that could be kept in a bureau drawer and not used, but carried with you in case of an emergency,” says Quinn. “It gives you peace of mind in situations like a hurricane and you need to be out of town for a month… you have a backup that can help you with that.”
If you choose to open a backup credit card, make sure you get it without an annual fee. After all, it makes no sense to pay an annual fee for a card that you do not plan to use often. Also, remember to check your account for fraudulent activity from time to time.
bottom line
As of September 2021, the average credit card balance is over $5,500. Most people with credit card debt didn’t intentionally accumulate it. — instead, it is often associated with either unplanned spending or unexpected expenses.
Building an emergency fund, setting up auto pay, and applying for a backup credit card are all strategies that can help protect your credit in the event of unforeseen circumstances.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.