How to manage the impact of COVID-19 on your credit score

There are two credit reporting agencies in Canada: TransUnion and Equifax. Here are five factors that these agencies use to calculate your credit score:

1. Your payment history (35%) – Are you consistently paying your bills and debts on time? Your payment history will include credit cards and loans, but it can also include payments to utilities and cell phones on contract. Your credit report does not include your mortgage payment history.

2. How much you owe (30%) – This is also known as your credit utilization, or how much of your total available credit you are using. Ideally, you should only borrow 30 to 35% of your available credit. Heavier borrowing or maxing out your credit cards is seen as risky behaviour by potential creditors, which will lower your credit score.

3. Your credit history (15%) – Developing a good credit score takes time. Lenders want to know that you have a history of using credit responsibly.

4. New credit applications (10%) – How often has your credit been checked in the last five years? Frequent credit inquiries or credit applications can lower your score.

5. Types of credit you have used (10%) – The forms of credit that you use will signal to potential creditors how you handle your finances. Having a mix of different types of credit and managing that credit responsibly will reflect positively on your credit score.

If you are concerned about the impact of these uncertain times on your credit score, here are two credit behaviours you should be aware of:

You are deferring or missing payments

As you may already know, many Canadian banks are allowing customers to defer mortgage payments due to COVID-related financial difficulties. Some banks are also offering temporary credit card relief, allowing customers to defer minimum payments in the short term. Your credit score should not be impacted by these deferrals. However, it is important to remember that ‘deferral’ does not mean debt forgiveness. You will still be responsible for accrued interest, and possibly increased payments, when the deferral period is over.

For creditors who have not agreed to deferred payments, missed payments on your part will likely result in a lower credit score. It is worth your while to contact these creditors directly to try to work out a short-term payment agreement. For example, a lower minimum payment or reduced interest rate may allow you to keep your account in good standing and avoid a hit to your credit score.

You are using more credit than usual

The past few months of the coronavirus pandemic has left many Canadian households financially stretched beyond their limit. If you are using more credit than usual to make ends meet, you are likely not alone. However, using all of your available credit – or maxing out your credit cards – will lower your credit score. And, unfortunately, those higher credit card balances will also result in higher interest charges.

In times of crisis, it is also tempting to apply for additional credit cards or other types of loans to cover expenses. While it is normal to apply for a credit card or loan occasionally, frequent credit applications can lower your credit score.

Each time you apply for new credit, the potential lender will check your credit report. Frequent credit checks like this – especially over a short span of time – signal to creditors that you may be having financial difficulty or that you are relying too much on credit to cover expenses.

A Licensed Insolvency Trustee can help

If you are concerned that your recent credit behaviour may be harming your credit score, there are steps you can take now to protect your future financial health. A Licensed Insolvency Trustee can sit down with you, review your financial situation, help you stress test your debt load and provide you with the tools and resources you need to navigate your finances during the coronavirus pandemic.

During this COVID-19 crisis, nothing is more important than ensuring the health and safety of our people, clients and communities. Currently the BDO Debt Solutions offices are temporarily closed, but we remain open. Our employees are working from home for the foreseeable future.

We will conduct consultations, sign-ups and counselling by phone or videoconferencing on whichever platform you are most comfortable with, including FaceTime, WhatsApp, Zoom and more. We will be as flexible as possible with appointment times. For documents such as income and expense reports, and tax information that must be sent by email or fax, we offer free scanning apps like Adobe Scan. We are also accepting pre-authorized debit (PAD) to make payments.

Call us at 1-855-BDO-DEBT and let us know how best we can serve you

Have you checked your credit score in the last few months? Join the conversation and find more resources and debt advice on Twitter and Facebook

by Jasmin Brown, BDO First Call Debt Solutions

How to manage the impact of COVID-19 on your credit score

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