Sometimes unforeseen disasters can spell doom for your credit, but there may be a way to give context to a credit score drop — the use of disaster reporting codes.
Find out how they work and if they could potentially lessen the COVID-19 impact on your credit.
A Little Background
Before we take a dive into disaster reporting codes, there are some basic facts to know about credit scores and credit scoring models.
First things first: there are three primary credit reporting agencies (CRAs) — Equifax, Experian, and TransUnion. Lenders and creditors may report account information to one, two, or all three of them (or potentially none of them). This means you have a separate credit report from each CRA that may or may not be like the others.
Credit scoring companies then take the information compiled by CRAs to calculate your credit scores. If your reported credit information varies between the CRAs, you will likely have multiple credit scores as well.
Not only are there different credit scoring companies (like FICO and VantageScore, for instance) but there are also different credit scoring models in use by those companies. These credit scoring models may vary in a variety of ways –– including how they treat disaster reporting codes.
What is a Disaster Reporting Code
A disaster reporting code (indicated by “AW”) is a code added to specific accounts on your credit report by a CRA or lender to indicate you are impacted by a widespread, unforeseeable event that could negatively impact your credit — like a hurricane, wildfire, or the current COVID-19 pandemic. In other words, it can give context to what a future lender or creditor sees on your credit report.
We’ll get in to how a disaster reporting code may or may not impact your credit score, but first a few facts that could be helpful to know:
You may request to have a lender add a disaster reporting code but they are not obligated to do so.
A disaster reporting code is not something consumers are allowed to add to their credit report. Instead, creditors or lenders must add the code — but it is not a requirement, even if you have proof you’ve been impacted by the event in question.
One disaster reporting code does not apply to every item on your credit report.
If a lender adds a disaster reporting code to your credit report, it only applies to that specific account — not your entire credit file. If COVID-19 is impacting your ability to manage multiple accounts, for instance, you will need to make a request with each lender or creditor to add a disaster reporting code.
It won’t permanently fix negative reporting that occurred before the code was in place.
Previous late payments may be temporarily negated with the use of a disaster reporting code, but chances are they will return once the code is lifted.
Disaster Reporting Codes: VantageScore vs. FICO
The impact a disaster reporting code may have on your credit score depends largely on the credit scoring model being used. We’ll focus on the two major players: FICO and VantageScore.
A credit scoring model created in a joint effort by all three CRAs, VantageScore considers a number of factors to create a credit score that’s used to evaluate your creditworthiness. These include:
- Total credit usage, balance, and available credit
- Credit mix and experience
- Payment history
- Age of credit history
(VantageScore 4.0 also considers the number of new accounts you have, but it’s less influential).
While VantageScore tends to consider disaster reporting codes more than FICO, how they impact or protect your credit score depends on the model being used.
VantageScore 1.0 and 2.0
According to VantageScore, these older credit scoring models will completely ignore an account that has a disaster reporting code in effect. This means both positive and negative aspects of the account (like payment history, credit age, credit utilization, etc.) will have no bearing on your credit score until after the code is lifted.
VantageScore 3.0 and 4.0
For both VantageScore 3.0 and 4.0, the use of a disaster reporting code negates only the negative payment history of the account the code is in reference to. In other words, it makes the negative credit score impact neutral while maintaining the positive credit score impact. This applies to missed payments before the code was placed and while the code is in effect. Once the disaster reporting code is lifted, one of two things is likely to happen:
- If the creditor placed your account in deferment or forbearance, any payments missed while the disaster reporting code was in place will continue to have a neutral impact on your credit score.
- If the creditor did not place your account in deferment or forbearance, any payments missed will have an impact on your score once the disaster reporting code is lifted.
In addition to missed payment reporting, VantageScore 3.0 and 4.0 will not include balances or credit utilization for the account with the disaster reporting code in place while calculating your credit score. However, this is only the case if an account is in a deferment or forbearance period. (This is because, technically, the debt is not due during this time.)
According to VantageScore, it is generally up to creditors to follow the suggested account reporting guidelines in the Credit Reporting Resource Guide from the Credit Data Industry Association. In other words, it’s primarily in the creditor’s hands to determine how your account will be reported during this disaster period and, as a result, how your score will be impacted once it’s lifted.
However, when it comes to COVID-19 and your credit score, this could look a little different. Under the CARES Act, if a creditor agrees to a deferment or forbearance plan, they generally must “report your account as current to the [CRAs], so long as you weren’t already delinquent on payments, according to Nolo.com.
According to a 2018 Mercator Advisory Group Analyst Report, FICO is used in over 90% of lending decisions in the United States, making it the most widely used credit scoring model. FICO calculates credit scores using different factors (in order of importance):
- Payment history
- Amounts owed
- Length of credit history
- Credit mix
- New credit
When it comes to disaster reporting codes, FICO generally does not allow them to carry the same weight as VantageScore. In an article for CNBC, credit expert John Ulzheimer said FICO scores are not protected by disaster reporting codes, instead they are, “purely cosmetic.”
According FICO, “…while special comment codes (like AW for natural disasters or CP for forbearance) are an additional option for reporting a borrower’s situation, these are temporary codes that will only be reflected in the credit file for as long as they are being furnished, which is typically only while the extraordinary circumstances are in effect.”
Instead of the temporary solution of disaster reporting codes, FICO encourages lenders to offer forbearance or deferment plans and report accounts as “current” instead of “delinquent” while these plans are in place.
What is Considered a ‘Disaster?’
Wondering when a disaster reporting code can be used to protect your credit score? According to VantageScore, this is used for “natural and other ‘declared’ disasters.” So while a hurricane or tropical storm would fit the requirement for a “natural disaster,” COVID-19 would be considered a “declared disaster.”
You can find a list of current natural and declared disasters on FEMA’s website here.
Other Tips for Keeping Your Credit Healthy
Feeling the coronavirus impact on your credit score? There are options to both protect your credit score and prevent a further credit score drop. Here are a few actions to consider:
Proactively talk to your lenders and creditors
Often, lenders or creditors will not automatically place your account in deferment or forbearance unless you speak with them directly. It’s important to try to do this before you miss a payment as credit score protections (like disaster reporting codes) may not help accounts that are already in default.
Keep an eye on your credit report
Knowledge is power. By staying on top of your credit report you can quickly address any issues as they arise, instead of discovering an issue down the road while applying for new credit.
Between now and April 2021, you can access a free credit report weekly from all three CRAs. Learn more here.
Dispute any errors you find
If you spot any information on your credit report that is inaccurate, incomplete, or incorrect, you have the right to file a dispute with the CRA reporting the information under the Fair Credit Reporting Act (FCRA). We outline how to write a dispute letter here.
Upturn can also file a dispute with TransUnion on your behalf — all for free. Sign up here.