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Often, consumers sign up for credit cards with the hope that they would be able to pay off their bills in time. However, this is not always the case. In some circumstances where it becomes very difficult, if not impossible, to pay on time, a credit card hardship plan can come in handy.
Most consumers don’t even know that such programs exist. However, average credit hardship plans have become more important than ever in the aftermath of the coronavirus crisis, where almost everyone is facing some degree of financial difficulties. Instead of letting late payments ruin your credit score, you should sign up promptly for a credit hardship plan, if you are unsure you would be able to pay promptly.
But at this point, another relevant question arises. What is the impact of a credit hardship plan on your credit score? Of course, the usefulness of a credit hardship plan depends on how well it can keep your credit score intact. Thus, it is imperative to learn about the effect of the credit hardship plan on your credit score.
How Credit Hardship Plan Impacts Credit Score
If you sign up for a credit hardship plan, it will not have an effect on your credit score. However, what ramifications it holds for your credit score in the future is an altogether different matter and one that is not terribly straightforward.
It largely depends on how it is stated on your credit report. Thus, before signing up for a credit hardship plan, you must ask your credit issuer about how it will report this event to major credit bureaus. You should be fully cognizant of what your issuer will say about you to the credit bureaus after you apply for the plan.
There is also another major possibility that you must consider. If you apply for the credit hardship plan, there is a strong chance that the issuer will suspend your account for the duration of the plan. This can have several consequences for your credit score.
Credit Utilization Ratio
First, it will increase your credit utilization ratio. This is not exactly good for your credit score as a credit utilization ratio can account for 30 percent of your credit score. And sadly, the credit utilization ratio has a strong impact on your credit score because those who utilize less of their credit limit are seen as responsible borrowers and scored likewise. As for those who borrow close to the full credit limit, they are seen as risky borrowers and their credit score will plummet.
When your account closes down, your utilization ratio increases. This is not good news for your credit score.
Second, it will worsen your credit mix. Credit mix can account for 10 percent of your credit score. The better your credit max, the better your credit score. If you have more credit cards and credit lines, then it gives lenders confidence in your ability to handle your finances. But with the closing of your account, your credit mix can go down and your credit score will take another hit.
Third, closing down the account will also adversely impact your credit history. The longer your credit history, the better, as longer credit history shows that you have experience and are well-poised to handle your finances. But if you close your account, particularly an old one, then your credit history will shorten and your credit score will plummet yet again.
So your credit score can take a few big hits if the issuer closes down your account as part of the credit hardship plan.
How a Credit Hardship Plan Can Ultimately Boost Your Credit Score
But before you turn away and decide not to sign up for the credit hardship plan, there is one very important factor that you must consider. Since you are considering assistance, it is virtually confirmed that you are facing serious hardships in paying back your dues. If you do not sign up for the credit hardship plan, then you could default on payments, which will go into your credit history and drag down your credit score.
Under such circumstances, you will have little choice but to sign up for the credit hardship program because it can help you to salvage your credit score, despite the initial setbacks. Without the plan, your credit score can possibly run into the ground. But with the plan, your credit score will initially falter, but as you pay on time, it can possibly recover and even improve.
The trick here is to stick to the payment schedule of the credit hardship plan. As long as you stick to the plan, all will go well. And remember that the plan can be far more lenient than the terms and conditions that you normally face. Without the plan, you will have to pay by relatively shorter deadlines and incur high interest and late fees if you cannot do so. Since you are facing financial problems, paying by the deadline may be unrealistic.
Thus, you will have to resort to the credit hardship plan, which, although initially detrimental, can help you to get back on track with magnanimous concessions like less or no interest, late fee waiver, no penalties, and most importantly, an extension of the due date.
Credit Hardship Plan for a Better Credit Score
A credit hardship plan can hurt your score initially, but its lenient and generous terms can help you to fight your way towards a better score. You will have to look into the plan to find out what concessions the issuer has in store for you since all plans vary to some extent. In general, these plans often cut down the interest rate completely or substantially and extend the deadline so that you pay on time. You can take advantage of this respite to bring your finances in order and pay on time.
Bottom line: as long as you stick to the payment schedule of the credit hardship plan, your credit score can improve. Instead of defaulting on payments (in the absence of the plan), you can pay on time so that your credit card issuer reports timely payments to credit bureaus.