June 25, 2020

Should I skip a loan payment because of the COVID-19 pandemic?

Should I skip a loan payment because of the COVID-19 pandemic?

SALT LAKE CITY — Did you take advantage of a lender’s offer to defer a credit card or car payment because of COVID-19? Better check your credit report.

Some consumers are complaining that they have been reported as delinquent after skipping a payment with what they thought was their lender’s blessing. In one case, a Florida woman had her car temporarily repossessed. Some lenders are chopping borrowers’ lines of credit. And millions of people with student loans on hold because of deferrals granted by the CARES Act may have seen their credit score drop.

The horror stories are unintended consequences of measures that were supposed to help struggling Americans weather the hardships of the COVID-19 pandemic. More than 20 million people in the U.S. lost a job during the pandemic; millions more have had a reduction in hours or have been furloughed. To make matters worse, grocery prices jumped, even as many households had more mouths to feed during widespread shutdowns that kept people home.

To help, the federal government and many finance companies and banks have let borrowers defer payments on student loans, credit cards and car payments. More than 100 million payments, the bulk of them student loans, have been skipped since the start of the pandemic, The Wall Street Journal reported.

“In general, I’ve been really impressed with the hardship programs that lenders have rolled out,” said Ted Rossman, industry analyst for Creditcards.com. But there are signs that lenders are increasingly concerned about the financial health of Americans, with some lenders tightening standards for new credit and others lowering credit limits, even for borrowers in good standing.

Should I skip a loan payment because of the COVID-19 pandemic?

Credit cards in New Orleans are pictured on Aug. 11, 2019. U.S. consumer borrowing plunged in April as households fretted about the disruptions caused by the coronavirus pandemic and cut back on their use of credit. The Federal Reserve reported Friday, June 5, 2020, that total borrowing fell by $68.8 billion, or 19.6%. That was the biggest one-month decline in percentage terms since the end of World War II.
Jenny Kane, Associated Press

Your credit report

The volatility of the credit market is such that Americans can now check their credit reports every week through April 2021 for free, as opposed to once a year as is the usual practice.

Here’s why credit experts say you should be taking advantage of that opportunity.

In addition to sending many Americans payments of $1,200 or more, the CARES Act passed by Congress in March ordered all federal student loan payments, both principal and interest, be put on hold from March 13 until the end of September. The paused payments were recorded differently by some companies that service student loans, however, and some people reported on social media that their credit scores had dropped by more than 50 points, in some cases, causing pending loans to be canceled.

On its student aid website, the U.S. Department of Education acknowledged that some borrowers had experienced “a negative change” in credit information, but said it was limited to third-party credit reporting sites, such as Credit Karma, not the primary credit reporting agencies: Experian, TransUnion and Equifax. It encouraged people with student loans to check their scores on those websites and said scores should not drop because of the deferrals, which were automatic. (Borrowers had to opt out if they wanted to keep making payments.)

Brian Gilder, a certified financial planner in Los Angeles and author of “The Financial Playbook,” said people should be doing that already, regardless of whether they have a student loan. The Federal Trade Commission has urged consumers to check their scores regularly, especially if they have made special payment arrangements because of the pandemic.

“For some reason, they may put a missed payment on there, and if that happens, that can really hurt your credit score,” Gilder said. “If you find a mistake, you want to dispute it immediately.”

Something else a credit report can reveal is the total line of credit associated with an account, which can also hurt your score if it shrinks. Lenders are allowed to do this but they must give the consumer 45 days notice in writing. And they can do this even if you’re a long, loyal customer. That happened recently to Rossman, who was notified by a lender that it was about to lower his available credit because he hadn’t been using the line of credit often enough.

During the Great Recession, Rossman said, about 20% of lenders decreased or cut lines of credit for prime borrowers; the number was up to 60%t for subprime borrowers. As such, he’s not surprised that lenders are doing this now.

That said, the combination of stimulus money and lender-offered forbearance and deferrals has so far prevented a wave of bankruptcies and defaults.

“Not to minimize the people who are struggling, but I’ve been struck by the fact that 6% to 10% of borrowers are in one of these (deferral) programs, which seems really low to me,” Rossman said. “And even of people in some stage of forbearance or deferral, many are continuing to make payments, and some banks are closing hardship programs for lack of use.”

Costs vs. benefits

That hasn’t been the case for everyone.

Shelley Tanner, a nurse in St. Petersburg, Florida, decided to accept her credit union’s offer to defer two car payments, and her car was repossessed because she did.

According to WFLA, a television station in Tampa, Tanner’s request for a deferral triggered an audit of her account. Most lenders offering deferrals only allow them for accounts that are up-to-date. The credit union said it discovered that Tanner’s monthly payments were 66 cents short of what was due, which made her officially past due, and the car was repossessed. After WFLA reported on the repossession, the car was returned.

That’s just one example of small things that could wreck a person’s credit score if people don’t pay attention to them and take action when something changes.

As to whether the potential of damaging one’s credit score is reason enough to avoid a deferral offer, that depends on an individual’s circumstance, said Talin Larson, a certified personal finance counselor with AAA Fair Credit Foundation, based in Salt Lake City. “I recommend them seeking out help by talking to different resources and gathering as much information as possible. Each individual situation is different, so it is best to review each situation differently and come up with a unique plan based on the individual,” Larson said.

While there have been complaints that some people have taken deferrals while employed and able to make payments, Gilder said that could be a smart decision, if those borrowers understand the costs.

“There really is no right or wrong answer. The question to ask is, am I able to sleep at night? Some people need to have that extra money in the bank,” he said. “It’s OK right now to sacrifice your long-term financial needs to protect your short-term needs to get through this. This is one reason people are taking money out of 401(k)s.”

That’s another provision of the CARES Act: The usual 10% penalty for early withdrawals from a 401(k) for people under age 59½ is waived during 2020 for coronovirus-related requests.

As for what happens when these programs expire, no one knows, but “lenders are feeling very cautious,” Rossman said. “So far, so good, relatively speaking. I do think there’s a risk ahead, once these programs expire and if they’re not renewed. What happens then? That’s definitely a concern.”

Meanwhile, Gilder recommends that people check their credit report at www.annualcreditreport.com at least every few months, more often if they have payments being deferred. And as for that lowered credit line — Rossman got his reinstated, by calling the lender and asking.

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