A major financial crisis is happening in the world. Unemployment rates here in the U.S. are spiking for the first time since we began recovering from the 2009 recession and The Federal Reserve Bank of St. Louis has estimated that the unemployment rate in the United States may reach over 32%; breaking the Great Depression record of 24.9% in 1933. If you find yourself experiencing difficult financial times, know you are not alone. Obviously a crisis can derail you from your financial goals. But in this post, I'm going to lay out tips and tricks to stay on track with your credit repair and financial goals with actionable ways to manage your money during and after a crisis.
First, I want to thank the sponsor of this post: Lexington Law, a trusted leader in credit repair. Right now, many people are losing their jobs and falling on really hard financial times. You may find yourself at higher risk of falling victim to financial scams or needing to rely more on your credit cards. If you do need to rely on your credit card more, it's imperative your credit profile is accurate to ensure you are getting the best rates and offers – bad credit can seriously cost you. Lexington Law generously offers FREE credit report consultations here. They work with individuals who have inaccurate, unfair, or unsubstantiated items on their credit profile.
Lexington Law also put together this helpful guide on how to prepare yourself for the next recession which is a good read since we haven't actually hit “recession” status yet (a recession is six months in a row of economic downturns).
Table of Contents
Credit Card vs. Emergency Fund during a financial crisis
- Should you use a credit card or your emergency fund during a financial crisis?
- What to do if you have a small emergency fund during a financial crisis
Financial Tips During Crisis
- Have conversations + create a plan first
- Understand how your credit score works
- Understand the credit cards you're using
- Prioritize payments
- Unsecured personal loan over credit card
- Weekly Credit Report
- Grace Periods
- Check credit card rewards balances
- Put other financial goals on hold
- Increase income
Practice Good Financial Health: Tips for financial goals during and after crisis
How To Stay On Track With Your Financial Goals During Crisis [+ After A Financial Crisis]
Credit Card vs. Emergency Fund: Which to use during a financial crisis?
If your goal is to limit debt and protect your credit score during the Coronavirus crisis, or any personal financial crisis, you'll want to think through your money moves before making them. Credit cards may help you ride out a crisis, but you want to use them smartly so you don't end up doing more harm than you need to.
Should you use a credit card or your emergency fund during a financial crisis?
There is no one size fits all answer when it comes to finances, especially here. I think it depends on how much money is in your emergency fund to begin with and how stable your current employment position is. If you have stable employment and over 9 months of living expenses in an emergency fund, I'd probably focus on only using your emergency fund.
However, if you have only $100 or $1,000 or a few months of expenses in an emergency fund, I'd alternate between using your emergency fund for expenses and credit cards to ensure you're stretching yourself as far as you can. Ideally you'll only charge what you can pay off by the end of the billing period on your credit card. But when you have a limited cash supply, in my opinion, it's better to preserve it.
My suggestion if you have a small emergency fund during a financial crisis:
Preserve your cash for things that don't take credit cards. Things like your rent or mortgage, some health insurance plans, and sometimes even utilities. A lot of basic needs (aka non-negotiables in our budget) only accept debit, check, or cash so dip into your emergency fund for those things first, while charging other items like groceries to give yourself some more time to pay off. Again, ideally you are only charging what you can pay off at the end of your billing period.
Have conversations + create a plan
Given that the entire world is basically in a financial crisis thanks to coronavirus, people and companies are more willing than ever to work with individuals. So start by having conversations with your landlord or mortgage lender, your employer, utility companies, loan services, and whoever you may have booked travel arrangements with.
See who can refund money, who can extend grace periods, lower interest rates, or waive fees. Many companies are implementing formal policies, but if you do not have something hard and tangible to reference after these conversations, get something in writing.
As a general rule of thumb, always document things like this. E.g. if your landlord is agreeing to give you a break, recap the conversation in an email, with a read receipt, and ask him to respond within a couple of days if you missed anything or there are any inaccuracies. While it's not a formal legal agreement, it could potentially help you if things go south down the road.
Understand how your credit score works
Understanding how your credit score works gives you the opportunity to lower your risk and increases the likelihood you'll stay on track with your financial goals during a crisis. For instance, late payments are one of the largest impacts on a person's credit score. One late payment can drop you as much as 100 points (read more about the impact of negative items on your credit report here from Lexington Law). Knowing this information allows you to prioritize making on time payments and working with your lender to avoid being reported late (even if you can't pay in full).
Another huge factor is your credit utilization ratio. Your credit utilization ratio is how much you charge on a credit card compared to your total credit limit. Knowing this information, you can make some strategic moves to keep this number as low as possible. For one, you could call your credit issuer and ask for an increased credit limit; this will give you an opportunity to maintain your credit utilization ratio or keep it lower than it would've been without the increased limit. Also, with this information in mind, you probably should not close any credit cards (your utilization ratio is calculated off the total amount of credit available to you, not a card by card basis). Read more about how your credit score works here.
Understand the credit cards you're using
Understanding your credit score is great for big picture moves, but understanding how your credit card operates is also essential. What happens if you have a late payment? What fees are associated with your card and how are they triggered? How do cash advances work and what do they cost you? What is your interest rate? Is there a fee for moving your balance to a difference card? If you do plan to move to a new, lower interest or no interest, credit card what is the minimum credit score you'll need for approval? Does that card charge you any fees for consolidating balances from other cards? Are just a few questions. Remember, you need to know this information for each credit card or line of credit you have.
If you're thinking about getting a new lower interest or no interest credit card to assist in navigating this time, read about What You Need To Know Before Applying For A New Credit Card here.
If you are currently paying off debt, hopefully you are following a debt repayment strategy. If you did not have any debt before the financial crisis of 2020, then looking at these 2 debt repayment strategies will help you understand how to prioritize your payments so you minimize any debt that you may need to carry during this stressful financial time.
Consider using a personal loan over your credit card
You may want to get a personal loan if: you can meet all the conditions (e.g. repay by X date), the interest rate is lower than your credit card, or you need cash for a necessity (e.g. home) that you can't use a credit card for. Typically you get these from your bank or credit union, however personal lenders are offering pandemic personal loans at the moment too. These types of loans are also known as unsecured personal loans or signature loans. As always, make sure you fully understand the terms you are agreeing to and can meet them. Learn more about personal loans in this article from Lexington Law.
Check your credit report weekly
Normally you can only pull your credit report from the big three credit bureaus (TransUnion, Equifax, and Experian) once a year for free. However they are now allowing you to pull your credit report weekly for free until April 2021 via annualcreditreport.com
Pulling your credit report weekly gives you an opportunity to:
- Catch errors ASAP and dispute them. With the rise of a financial crisis also comes the rise of financial scams. The last thing you need right now is for your identity to be stolen, so stay on top of this. If you believe your identity has been stolen, contact Lexington Law today for your FREE credit report consultation. They have years of experience in helping their customers repair their credit from unfair, inaccurate, or unsubstantiated negative items which are frequently associated with stolen identities.
- Ensure accuracy: Make sure you recognize all of the accounts, all of your information is correct, and any account in good standing before pandemic allowances were put into place that is now in forbearance or deferment is being reported as current per the CARES Act (read more about the CARES Act here from Lexington Law).
- Check for disaster codes (if applicable): A disaster code basically explains changes in behavior on your credit report to a lender or landlord. They don't hurt your score and can be helpful if you are trying to get a loan or new lease during the recovery period after a financial crisis. You typically need to request these to show up on your credit profile.
Don't rely on grace periods
A grace period is the time after your billing cycle ends, but before your credit card payment is due. It only applies to new purchases. If you did not pay your balance in full from your last billing cycle, you may not have a grace period at all. Learn more about what a credit card grace period is and how it works here from Lexington Law.
Check credit card rewards balances
One of my personal financial goals is always to have my money working for me. Meaning that yes, I am using credit cards, and yes they are rewards credit cards – because I deserve a little love back for my spending! I always redeem them around the holidays. However, if I'm totally honest, I typically forget about them the rest of the year until something happens to remind me they exist (like writing this post, hearing someone talk about their credit card reward, etc.). So here is your friendly reminder to check the digital change in your cushions so to speak and redeem those rewards!
Put other financial goals on hold
If staying out of debt or repairing your credit are top goals during the financial crisis, then it may be wise to put other financial goals on hold. Last week I shared how to prepare your finances if you think you'll be laid off, where I talked about diverting retirement savings to your emergency fund right now. That applies here too. Hold off on secondary goals such as retirement, travel, or other secondary financial goals and focus on just your one or two high priority goals right now. Trying to do everything at once often gets us nowhere compared to doing one thing really well.
Increase your income
One way to stay on track with your money goals during a financial crisis, or after a crisis, is by increasing your income. Increased income means more money to help you stay out of debt and on track with your goals. Just make sure you don't inflate your lifestyle spending now that you see a larger number coming in each month.
Practice Good Financial Health:
As always, you want to make sure you're doing all of the other things to stay financially healthy whether we are in a financial crisis or not. These include:
Reduce your spending
Stress spending is a real thing and what's more stressful than being asked to stay inside your home for months with no end in sight while millions of people lose their jobs? Many people are reaching for their credit cards and doing some online shopping for that quick serotonin hit that happens when we make a purchase. But don't fall into the trap! Instead, try doing a no-spend challenge during this time to stay on track with your money goals during the crisis.
Stick to a budget + monitor spending
One of the easiest ways to make progress on any financial goal is to stick to a budget and monitor spending. When you have a plan for your money, you are less likely to stress shop. When you monitor your spending, it's an act of self love. It gives you the opportunity to catch inaccuracies and ensures you are actually following through with the plan you laid out for your spending. Check out my favorite simple budgeting strategy here and ways to save money on groceries every month here (since let's be real, that's usually where most of our money is going!).
Only draw from your emergency fund when you need to
Emergency funds are there for exactly that: emergencies. And yes, the current coronavirus crisis is an emergency, and for just as many people who have reached full on crisis mode, there are just as many people who have not been financially impacted yet. If you're in the latter group, plan ahead using these tips to flatten the curve on your own financial crisis.
While times may be challenging right now, that does not guarantee they will be challenging forever. By getting involved with your current financial situation, you are giving yourself the best opportunity to stay on track with your money goals through this financial crisis. If you feel in over your head trying to understand your credit profile, give Lexington Law a call today for your free credit report consultation here.