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Coronavirus Aid Programs Risk Upending Privacy, Credit Scores

By Joanne Cleaver

Natural disasters inflict chaos on personal finances and credit, whether the disaster is a tiny and devastating virus or a huge and calamitous hurricane.

The repercussions on credit scores, credit histories and the effort to control your financial information can last for months, if not years.

The privacy fallout from the economic impact of COVID-19 will very likely replicate on a national scale the headaches that trailed in the wake of Hurricane Katrina, expects Jude Boudreaux.

Boudreaux, a senior financial planner and partner with the Planning Center, a personal financial-planning firm in Moline, IL, has lived and worked his entire life in Louisiana.

Now, as in the wake of the hurricane, financial institutions “recognized that this was a major situation outside our control,” he said of the widespread effects on consumer financial data of the upheaval. “There’s a precedent for it.”

“Credit scores are typically most damaged by late payments.”

— Bill Handel, vice president, Raddon.

Sorting Out Katrina’s Damage

Fifteen years ago, Hurricane Katrina swamped New Orleans and ruined many residents’ financial stability.

It took months, he told Digital Privacy News, to sort out the damage to their credit scores, credit histories and relationships with lenders.

Contradictory directives, short-staffing and tangled recovery plans made it difficult for consumers to understand exactly what lenders knew about their situations and what data was passed on, accurately or not, to other institutions.

In many cases, lenders extended grace periods that inadvertently touched off confusion about how borrowers needed to manage their financial data.

One thing is clear for consumers who must shepherd their data through the post-virus financial wreckage: Despite in-the-moment offers from lenders, borrowers still must open and navigate complex conversations about exactly how late or skipped payments will ripple through the financial-reporting infrastructure.

It is not safe, Boudreaux and other financial experts cautioned, to assume that goodwill will automatically insulate credit histories and scores.

Faulty Data on Credit Reports

Months after Katrina itself evaporated, New Orleans residents were discovering inaccurate personal financial data had appeared on their credit reports, inflicting another wave of cleanup.

With illness and unemployment rising as COVID-19 works its way across the country, the implications of credit decisions understandably lag pressing health issues.

Consumers must actively manage debt payments and credit reputations to prevent long-term damage to scores, experts say.

Still, unemployment is spiking — despite a recently approved $1 trillion federal stimulus package — and a recession is all but certain.

While millions of Americans wait for the big economic picture to take shape, lenders and governments are offering short-term fixes intended to create some breathing room.

The Federal Deposit Insurance Corp., has requested banks to offer short-term relief to consumers.

Citibank, for instance, has opened hotlines for working with customers in financial distress and has waived monthly service fees for consumers and small-business customers, as well as penalties for withdrawing funds early from certificate of deposit accounts.

Some countries where the coronavirus has virtually shut down daily life are taking unprecedented measures. Italy, for example, has ordered all mortgage payments suspended.

Manage Payments, Check Reports

Short-term help, though, might come at a long-term price.

Consumers need to actively manage their payments and credit reputations to ensure that taking advantage of immediate help doesn’t erode credit scores that took years to build.

The credit-scoring system is not wired to automatically recognize circumstances inflicting financial harm, financial experts told Digital Privacy News: To the contrary, the system is likely to report consumers’ failures to pay in full and on time, even if that failure is because of extraordinary events like the economic fallout of COVID-19.

Already, financial experts are warning about the damage to credit reports that will likely result when homeowners seize the chance to suspend mortgage payments under a recommendation made by secondary mortgage lenders Fannie Mae and Freddie Mac.

The problem is that credit-reporting machinery is not set up to factor in payment patterns that change in response to grace periods.

In the automated mind of credit-reporting agencies and risk-calculating algorithms used by lenders, a late payment is a late payment — regardless of the rationale.

Consumers must birddog the accuracy of their data when their payment history changes due to a crisis-induced offer, financial experts said.

Communication Is Critical

Communicate directly, early and often with banks and lenders, because their decisions about your payments translate directly to your credit history, which dictates your credit score.

“Credit scores are typically most damaged by late payments,” Bill Handel, vice president of research for Raddon, a division of financial data firm Fiserv, told Digital Privacy News.

“Financial-institution offerings like ‘skip-a-pay’ are helpful in times like these because they can help people avoid this situation.”

At the very least, make a conscious decision to prioritize health over credit score, with full awareness that paying late, or skipping some bills to cover essentials, will trigger a tedious clean-up later, said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington.

And, as Boudreaux observed in New Orleans post-Katrina, long-term hardship programs can sometimes tip a shaky account into arrears, McClary added.

Partial or skipped payments must be deliberately insulated by your lender from your credit report, a high-maintenance chore managed by the unlucky customer.

“You don’t want your credit score to take a hit because it looks like you’re not making your payments,” McClary said.

Compassion, Flexibility Necessary

Given the history of financial institutions’ errors in the 2008-2009 mortgage crisis, and the resulting chaos in personal financial data, “We aren’t wrong to assume that they might not be on our side, but, with that said, the financial industry is being brought to its knees,” said Danetha Doe, founder of Money & Mimosas, a financial education website based in Oakland, Calif.

Consumers and companies are arriving at the same time to a “trust-and-verify” moment, she told Digital Privacy News.

“Institutions will realize that things need to change swiftly — and compassion needs to come first, or they will not survive.”

Joanne Cleaver is a business journalist based in Charlotte, N.C.


SIDEBAR:
Protecting Your Credit Amid COVID-19

“Desperate times make for desperate people,” Jude Boudreaux, a New Orleans-based senior financial planner, told Digital Privacy News. 

Thieves sometimes take advantage of chaos to hijack identities.

“Look at your credit report to make sure something new didn’t find its way on there,” he said. “The more unstable everything is, the more opportunity [for thieves].”

Here are some other ways to protect your credit amid the pandemic:

Pull your credit report, review it, and if there are errors, correct them. If you are concerned about the ripple effect of taking advantage of a program offered by a lender, call the institution and get it on the record that you asked about the implications of late or delayed payments on your credit report.

Consider refinancing. With mortgage rates plummeting, financial advisers say refinancing might be a good idea, assuming the process can be handled safely, given the erratic availability of transaction support providers.

“I wouldn’t take on new debt right now, but refinancing what you’ve got could be a good opportunity,” Boudreaux said.

Consistent payments prove good intent.  

Be wary of generous offers, such as free or reduced-cost cable service. Such offers might be very difficult to start paying once the national emergency eases.

When in doubt, financial experts said, assume that the usual rules still stand.

Regional members of the National Foundation for Credit Counseling provide free counseling:  https://www.nfcc.org/

— Joanne Cleaver


Sources:

  • www. msn.com/en-us/money/personalfinance/list-of-banks-offering-help-to-customers-impacted-by-the-coronavirus/ar-BB11jE4b
  • online.citi.com/US/JRS/pands/detail.do?ID=covid19
  • www. bbc.com/news/business-51814481
  • money.yahoo.com/coronavirus-homeowners-delay-mortgage-payments-202251121.html
  • nfcc.org/