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How Does a Natural or Declared Disaster Impact My Credit?

If you've been affected by a natural disaster in recent years, you're not alone. The number of weather-related natural catastrophes more than quadrupled between 1980 and 2018, according to the Insurance Information Institute. Disasters aren't limited to natural events like floods, wildfires or tornadoes, however; state governors and the president may also declare a disaster based on a terrorist act or disease outbreak, like what was done in response to COVID-19.

In addition to the direct harm it can cause to your health or livelihood, a natural or declared disaster can affect your credit by making it harder for you to pay your bills or forcing you to rely on credit cards to make necessary purchases. Fortunately, there are several steps you can take to keep a disaster from damaging your credit.

Ways a Natural or Declared Disaster Can Affect Your Credit

A natural or declared disaster may destroy your home, damage your possessions or hurt you and your family. But while you're putting your life back together, a disaster can also impact your credit in several ways.

If you're injured or have to take time off to care for injured family members, you might not be able to go to work. Or you might be laid off or have your wages or hours cut. With your income reduced, you may find it harder to make your monthly payments, such as your credit card bills, rent, utility payments or mortgage. Missing payments can have a negative impact on your credit score.

To help make ends meet, you might need to turn to credit cards to pay ordinary expenses. And even if your income isn't affected, a disaster often means extra expenses. For example, after a flood or fire that damages your home, you might have to pay a hefty insurance deductible, pay a contractor for repairs or even pay hospital bills.

On the positive side, your credit cards may be able cover these disaster-related expenses and provide a quick source of needed cash. But using them will increase your credit utilization ratio, or the percentage of your available credit you're using. A credit utilization ratio of 30% or higher will have a more significant negative effect on your credit scores. Ideally, you should try to pay your balances in full each month or at least keep your credit card balances as low as possible.

Despite the possible negative consequences of a disaster, there are steps you can take to preserve your credit and stay on solid financial footing.

How to Get Help During a Crisis

After a natural or declared disaster, your top priorities are taking care of your family, assessing any damage to your home and meeting immediate needs such as food, shelter and medical care. But what should you do if you're having financial difficulty as a result of a natural or declared disaster and think you may have trouble paying your bills?

Contact your lenders and credit card issuers as soon as possible to ask about hardship options. Don't wait until you've already missed a payment: In some cases, you won't be eligible for hardship options unless you contact lenders before your payment is due.

The hardship options available to you will depend on your lender and your individual situation. Lenders may temporarily reduce your interest rate or your payments, pause your payments for a period of time, or place loans in deferment. For example, some types of student loans may be eligible for deferment; homeowners may be able to get a mortgage forbearance, which can reduce or suspend mortgage payments for up to 12 months. When a loan is in deferment or forbearance, lenders typically won't report nonpayment to the credit bureaus, so your credit score won't be negatively affected.

In addition to contacting your lenders and creditors, reach out to your utility, cellphone and cable providers, as well as any other monthly services you pay for, to see if they can offer flexible payment options. You'll never know what kind of relief is available unless you ask.

Are your taxes coming due in the near future? Contact the IRS and your state tax authority to see if you're eligible for any special tax relief as a victim or a natural or declared disaster. The IRS may give you a deadline extension, let you split your tax bill into payments, or even reduce the amount you owe.

Tips for Protecting Your Credit During a Disaster

Once you've made sure you and your family's immediate needs are squared away, and you start thinking about what it will take to get your life back to normal, it's a good idea to keep an eye on your credit, too.

Unfortunately, thieves and scam artists often take advantage of disasters to prey on people who are seeking help to rebuild their lives. That's why it's critical to monitor your credit in the aftermath of a disaster. Checking your credit report can help you prevent crimes such as identity theft or fraudulent use of your credit cards. It also helps to protect your credit score.

Be sure to check your credit with all three major national credit bureaus (Experian, TransUnion and Equifax). You can get a free credit score and a free credit report from Experian. In response to the COVID-19 crisis, you also can request a free credit report once a week from each of the national credit reporting companies through April 2021.

Review your credit report carefully, looking for any inaccuracies or suspicious activity. If you find anything you believe to be inaccurate, you can dispute the information with the credit reporting agency where you found the information. Disputing information on your credit report is free and easy to do online, by phone or by mail.

Continue to monitor your credit on a regular basis. Experian's free credit monitoring service is an easy way to get alerts of any suspicious activity on your credit report.

Disaster Plan

Whether it's natural or man-made, a disaster can throw your community, your life and your finances into disarray. But by reaching out to creditors quickly and monitoring your credit report, you can protect your credit and bounce back from a disaster with your credit score intact.

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