In case of emergency: Protecting your credit from the unexpected

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Your credit score is one of your most important assets and having a good credit score will help your finances in a variety of ways — from better access to credit to lower interest rates.

A FICO® Score typically ranges from 300 to 850 and is calculated based on a variety of factors, including your payment history and how much of your available credit you’re using.

Planning for emergencies will go a long way in making sure that you have a system in place to protect your credit score should something happen.

How emergencies affect your credit score

There are a variety of different versions of FICO credit scores used by lenders (including the UltraFICO™ Score), but emergencies affect them all in a similar fashion.

Unexpected expenses

In many cases, an emergency can lead to unexpected expenses. This could include things like a natural disaster forcing you to leave home for an extended period of time or unexpected car or house repairs. You could also have a job loss or a reduction in hours that might cause an unexpected lack of funds.

Emergencies can lead to covering these expenses with a credit card, which may mean you can’t pay off the full credit card bill when the payment is due.

“Your credit utilization on your credit card [will] dramatically increase, percentage-wise,” says Catherine Collins Alford, co-founder of Millennial Homeowner. “This can cause your score to drop, as your credit utilization, i.e. the amount of credit you use in relation to the amount of credit a lender extends to you, contributes to 30 percent of your credit score.”

Missed payments

Another way that an emergency can affect your credit score is if you miss a payment on one of your credit cards, loans or other debts. One of the biggest factors in calculating your credit score is how you meet your existing debt obligations. Lenders want to know your reliability in meeting your credit obligations, and a credit score is one way to quantify this information.

Depending on your emergency, there could be a few reasons why you might miss a payment. You or someone in your family might be sick, for example, and meeting a payment due date might slip. Or, you might simply be out of money to make any payment at all. Whatever the case, there’s no denying that a missed payment can drastically lower your credit score.

How to protect your credit score from emergencies

The best time to plan for emergencies is before the emergency happens.

“You protect by planning and anticipating emergencies,” says Walter Russell, seasoned financial advisor and CEO of Russell and Company. “You can’t plan for every emergency, but your job is to try to reduce your risk.”

Here are a few ways that you can do to protect your credit score from emergencies:

Build an emergency fund

Building an emergency fund is one of the best things that you can do to protect yourself and your family from unexpected expenses.

The amount of money you place in an emergency fund is a matter of personal preference, but many experts recommend three to six months’ worth of expenses.

If that seems like an insurmountable goal, start building your emergency fund with whatever you can afford. One way to start is by subtracting a specific recurring expense (for example, a gym membership you rarely use, daily Starbucks run or eating out) and putting that money into a separate savings account. Continue by adding in any extra money throughout the year (such as work bonuses, tax refunds and cash made through yard sales). Before long, you’ll have a worthy emergency fund that can help protect you when things go wrong.

Put payments on autopay

Another strategy to help protect your credit score when something unexpected happens is to make sure that your accounts have at least the minimum due selected for autopay for credit cards or loans. That way, even if you have a major medical event or other catastrophic calamity, you won’t miss a payment — saving your credit report and credit score in the process.

Ask your lender for a payment accommodation plan

While it’s true that lenders can make allowances in the case of an emergency, score-calculating formulas do not consider financial situations due to COVID-19 or other emergencies as negative, in and of themselves. But, there are still ways to help ease these situations.

“Reach out to your lender to make them aware of your circumstances,” says Tom Quinn, vice president of Scores at FICO. “Many lenders want to keep you as a customer and will work with you to try to ease the pain on a temporary basis of that situation that you find yourself in.”

Most lenders have programs to work with borrowers in need, whether it’s for a medical emergency, job loss or other unexpected situation. If you reach out to your lender and keep them informed of your situation, most lenders will try to accommodate you. Just make sure that you keep the lines of communication open.

Apply for a backup credit card

Quinn recommends applying for a backup credit card as a possible mitigation strategy against unexpected expenses.

“It’s not a bad idea to potentially apply for and gather additional credit cards that one would keep in the bureau drawer and not use, but have available in case there is an emergency,” says Quinn. “That gives you peace of mind for situations like where a hurricane strikes, and you have to go out of town for a month… you have some backup that can help you do that.”

If you do decide to open a backup credit card, you’ll want to make sure to get one with no annual fee. After all, it doesn’t make sense to pay an annual fee on a card that you aren’t planning on using often. Also, be sure to occasionally review your account for fraudulent activity.

Bottom line

As of September 2021, the average balance on a credit card is over $5,500. Most people with credit card debt didn’t intentionally accumulate it — instead, it’s often a matter of either unplanned spending or unexpected expenses.

Building an emergency fund, setting up autopay and applying for a backup credit card are all strategies that can help protect your credit when the unexpected happens.