Q: My husband and I both lost our jobs last week. While he can still do some woodworking projects from home, it’s not enough to pay our rent and bills. We’ve done all we can to defer payments and a few of his suppliers have told him to pay him later when he’s back to his full-time job. We’ve got a bit of savings because we’ve been working on coming up with a down payment to buy a place of our own. Combined with some help from the government, we’ll be OK for a few months with our emergency budget. The thing is, though, our rent is super reasonable because we live in an old house on a property that will be sold to developers sooner than later. If our credit rating goes down, we won’t be able to buy anything when we’re told to move. Even to rent somewhere we’ll need a good credit rating and fair-sized deposit. We feel stuck; what should we do? ~Darcy
A: These are undoubtedly the most challenging times many of us have ever faced. When it feels like our life is hanging by a thread that could snap at any moment, it can be hard to find the best course of action to weather the storm. Thankfully there is a lot of help available that will make it a bit easier to get by.
An emergency budget is one of the best first steps to take. Paring your expenses down to the bare bones will show you how much income you need to survive. Income replacement through EI (employment insurance), financial assistance from COVID-19 government initiatives at the federal and provincial levels, side jobs that you can still safely do, and cash savings are your most likely sources of funds right now. Submit any assistance applications as soon as possible because it will take time to get the funds into your bank account. It can be sad to think about depleting a savings account that’s earmarked for another purpose, but in times of crisis it does become an option to fall back on, if needed.
Protections for credit ratings
While many can see how their budget will recover once they return to work and the coronavirus crisis is over, the impact on our credit remains a stressful unknown. Deferring payments and/or making alternate payment arrangements, and accepting assistance initiatives from your creditors, could impact your credit rating . However, being unable to make your payments without any special arrangements guarantees a more severe impact.
Creditors have yet to make known what they will do to protect their customers’ credit ratings during these crisis arrangements. What many people fail to realize though, is that as much as we want to protect our own credit rating, lenders want to protect it too. If they don’t, it will be much harder to lend clients more money down the road.
During a time of reduced income, however, it is essential that we take care of our basic needs before worrying about any long-term impact to our credit rating. With that in mind, here are three reasons why it’s a bad idea to worry about your credit score, regardless of your current income situation:
1. It will distract you from paying attention to your finances
There is more to you and your finances than your credit score. A score doesn’t include your budget, savings, goals, income, and things that make your situation unique — e.g., pensions, life insurance policies or extended health benefits through work. How you manage your overall financial situation can drastically impact your credit score, and that is why paying attention to more than just your score is crucial.
7 Things That Are Not on Your Credit Report
Only worrying about your credit score may also cause you to make financial decisions that will hurt you in the long run. For instance, during a reduction in income, you may be tempted to cash out your RRSPs to pay off your debts. While this could eliminate costly credit card payments, it could leave you without cash to pay for essentials if you face an extended period without income. This will force you back to using your credit card to make ends meet, with no good way to keep up with minimum payments.
In such a scenario, if you had focused less on protecting your credit score, you would have realized that cashing out RRSPs should be an almost last resort. Not only does that leave you without a safety net, it means you’re stealing retirement income from your future self which you may not be able to recoup (especially if it takes longer than anticipated for markets to rebound). Cashing out RRSPs also comes with tax consequences, which might not seem like a big deal when your income has been slashed, but it could affect your entitlement to government benefits in the future.
RRSPs are a somewhat sacred savings vehicle, largely protected even from bankruptcy. Using a long-term savings vehicle to solve a short-term cash crisis because you want to protect your credit score is just one example of how focusing on your score means you miss the mark.
How Is a Credit Score Calculated?
2. It might cause you to worry about things you have little control over
Each credit bureau company has its own way of arriving at someone’s credit score. They have proprietary software which leaves a lot of unanswered questions. Your credit score will vary between credit bureau companies because each one weighs information on your credit report slightly differently.
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If you spend time worrying about how your credit score is calculated, you’ll worry forever because there are so many unknowns. Spend time, instead, working on the factors you do have control over and can do something about. For instance, late payments are always an important part of each credit scoring analysis. During a crisis it can be hard to keep up with all of your minimum payments; however, knowing that this is an important part of your credit score will help you prioritize paying bills on time once the crisis is over.
3. It can impact your opinion of yourself
How we feel about ourselves is often decided by comparing ourselves to others. A credit score is exactly that — a financial comparison of ourselves to others in terms of our credit behaviour. If we don’t feel good about how we stack up, our opinion of our self can be negatively impacted.
Feeling worse about ourselves makes it more difficult to stay motivated toward reaching our goals . While it’s healthy to have a competitive spirit, focusing too much on the success of others can lead to you beating yourself up and becoming afraid of failure. Once these negative emotions take hold, seeing your way out of a financial crisis will slowly start to feel impossible.
If it gets to a point where your critical inner voice rears its ugly head, you could sabotage whatever you’re working toward because you’ll feel like you’re not worth the effort. For instance, you might be trying to save up an emergency nest egg for the next time you lose your income — and then doubt if it’s worth the effort because you’re undeserving of it. If feelings of worthlessness creep in and cause you to worry about failing as you strive toward success, it can become a vicious cycle that’s hard to escape. If this is something you struggle with, a psychological counsellor can be a good person to get help from.
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The bottom line on why not to worry about your credit score
Taking care of our most important expenses and managing our money effectively is a lot more important than trying to maintain a good credit rating and strong credit score. Paying all of our bills on time is irrelevant if we compromise our health and well-being because we’ve used our grocery or medication money to make minimum payments. Do what’s best for your situation and be conscious of your spending. Create and use a relevant budget . Then know that even if your credit rating dips and it take a little longer to recover than you’d like, it will recover as your situation recovers. And what you learn along the way will benefit you for years to come.
Related reading:
Solutions for Debt Problems in Canada
3 Ways People Destroy Their Credit
Tips to Help Be Desirable to a Potential Landlord
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check nomoredebts.org or call 1-888-527-8999.
Copyright Postmedia Network Inc., 2020
