Money Kuel Category Expert: Joy Alford-Brand
As we exit the month of June, the saga of the Coronavirus continues to unfold, physically and economically. I’m hearing reports that many people have begun dipping into their retirement accounts to bridge the gap of lost income.
This is due to the rule in the recently passed CARES Act legislation that temporarily allows you to take up to $100,000 out of your 401(K) or IRA penalty free, under certain circumstances.
“Leave your retirement accounts alone, if at all possible”
Leave Retirement Accounts Alone If Possible
I probably don’t need to say this but, I will anyway. If you can, avoid tapping your retirement savings to pay living expenses. The likelihood that you will be able to replace that money is not very high. And, women already are statistically behind in retirement savings. If you don’t believe me, check out this article from Marketwatch.com that breaks it down very clearly.
The downside of tapping your retirement savings is compounded since the market is so volatile right now. You could be taking out your money at the bottom of the market, totally defeating the purpose of time and compounding. The long and short of it is, leave your retirement accounts alone, if at all possible.
Far Reaching Economic Fallout
“I am not surprised at the response by the credit industry to the massive wave of job losses.”
While I try to stay positive during this difficult time, I am fully aware that the economic fallout from this pandemic will likely be far reaching. The best thing I can do to help people get through this is to make them aware of potential financial pitfalls. One thing that you need to be aware of immediately is how the current economic environment could affect your credit. Especially, for those of us who may need access to credit to help us bridge the income gap temporarily.
As a bankruptcy attorney, I am not surprised at the response by the credit industry to the massive wave of job losses. It happened in 2008 and I fully expect it to happen again. Their primary interest is, of course, to limit risk by limiting delinquencies, defaults, and charge offs; as more and more people cannot pay their credit card bills. They limit their risk by exercising control over consumer accounts. Which, they have a great deal of.
What Does This Mean For You; The Consumer?
First, it will likely be harder to get access to credit. This means you will have to be able to demonstrate creditworthiness by having verifiable proof of income and a really good credit history. We’ll talk more about that in a minute.
Second, they will likely be monitoring existing accounts for creditworthiness. This could mean if you’ve made payments late or, recently charged a lot in a short period of time, you may not be a good credit risk. In the event you are deemed to be a poor credit risk, the credit card company may reduce your available credit limit or close unused accounts.
Third, your credit score will drop if your available credit and/or credit utilization ratio changes. Your credit utilization ratio is the amount of credit you are using in comparison to the amount of credit you have available to you. A high credit utilization ratio will result in a deduction of points from your overall credit score. So, the higher your credit utilization ratio, the lower your credit score. Of course, there are other factors involved in calculating your credit score, that’s true. However, a high credit utilization ratio can definitely hurt your score.
For example, if you had a card in January with a $10,000 limit on it with a balance of $2,000, you were using 20% of your available credit. Now, let’s say you were a server and you haven’t been able to work since the end of March. Your credit card company notified you that they cut your available credit limit to $5,000. Even if you have been lucky enough to make the minimum payment on your $2,000 balance (in an effort to protect your credit), you are now using 40% of your $5,000 available credit. This will definitely inflate your credit utilization ratio and reduce your credit score.
Check Your Credit Reports For Free
While the last thing we should have to worry about right now is our credit score, it looks like we still have to be vigilant about it. The good news is that Equifax, Experian and Transunion are allowing you to check your credit reports every week for free until April of 2021. This website was set up after federal law required the three largest credit reporting agencies to give consumers access to one free credit report per year. I strongly suggest you take advantage of that opportunity and start keeping an eye on credit reports as soon as you can.
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About the Author:
Joy Alford-Brand is an author, public speaker and attorney. She graduated with Bachelor’s Degree in History from Wright State University in Dayton, Ohio in 1994 and she received her Juris Doctor from Ohio State University College of Law in 1998. Her main area of practice is Bankruptcy. She is admitted in North Carolina where she lives and works. Joy founded newcashview.com in 2015 as a platform through which she could help others work toward financial freedom and peace of mind! For more information, check out newcashview.com.
