How to Maintain Good Credit During a Financial Setback

According to the 2023 Northwestern Mutual Planning & Progress Study, 67 percent of Americans believe the country will enter a recession later this year. While the job market has remained relatively strong, there have still been some big headlines about layoffs at major employers.

Whether you have had a recent financial setback or are worried that you may in the future, it’s a good idea to take some steps to keep your credit score in good standing. Doing so can have a significant impact on your ability to borrow money—whether it’s for a mortgage, a personal loan or a new credit card. Here’s how to maintain good credit during a financial setback.

Steps to maintain good credit

Contact your lenders

Creditors know that people can have trouble paying their bills during a hardship (such as a job loss). If you know you will need to miss a payment or can make only a partial one, let your lenders know. Just make sure to do so before the payment is due. Your lender may be willing to offer some temporary relief. Be sure to get all the details of the agreement in writing in case you need to reference them in the future.

Look into student loan and mortgage forbearance

Two monthly bills that can have a serious impact on your credit are your mortgage and student loans. If you’re having trouble paying either loan in full, ask your servicer about forbearance. This can allow you to pay at a lower rate or even temporarily skip payments. However, it’s important that you fully understand the financial implications and repayment terms before opting in. You’ll want to find out if you’ll owe a lump sum once the grace period ends or if your monthly payments will be higher once your repayment period starts.

Watch your credit utilization

Your credit score is made up of multiple factors, and a key part is your credit utilization. This is how much you use of your available credit, and experts recommend you keep your balance below 30 percent. If you find you’re approaching your credit limit, you may be better off spreading your bills over more than one card or asking your credit card issuer for a credit limit increase.

Consider opening a new card

While it might sound counterintuitive, if you have a large balance on a high-interest card or your balance is more than 30 percent of your credit limit, you may want to consider transferring your balance to a low- or no-interest credit card. Many cards offer a zero-percent introductory annual percentage rate, which can be helpful if you’re trying to pay down debt. Just make sure you understand the terms, such as when the introductory rate period ends and what the new interest rate will be.

You’ll also want to know what can cause the introductory rate to jump prematurely, such as missing minimum payments during the introductory period. If you decide to open a new card and transfer the balance, leave the previous account open, as part of your credit score is based on the longevity of your accounts.

Put your bills on automatic payment

When you’re in the middle of a stressful situation, it can be hard to remember when various bills are due. But even one missed payment can have a sizeable effect on your credit score—in some scoring models, on-time payments account for 35 percent of your total score. Automating payments means you’ll avoid missing one inadvertently.

Remember that inquiries can affect your score

Remember that any financial moves you may make during this time, such as refinancing your mortgage, applying for a personal loan or asking for additional credit, will require potential lenders to check your credit. These types of inquiries are known as “hard pulls” and can have a slightly negative effect on your credit score. They’ll also remain on your credit report for about two years. While credit inquiries are unavoidable, make sure you’re truly interested before applying.

Keep an eye on your score

While it’s always wise to keep regular tabs on your credit score, it’s a particularly sage move if you’ve experienced a financial setback. If you see a drop in your score, it could signal a missed payment or indicate that the agreements you worked out with your lenders are not being honored. Set regular calendar reminders to check your score so you can start improving it sooner rather than later.