Payment holidays taken to help with coronavirus hardship may well impact credit applications in the future, even though your credit score won’t be affected.
Even though credit scores will not be directly impacted, lenders may be able to determine whether someone has taken a payment holiday and use that information when assessing a credit application.
Here, Which? looks at how payment holidays work, what credit reference agencies and lenders are doing to protect borrowers that claim the relief and what actions you need to take to ensure your credit score doesn’t take any damage.
- For more about which lenders are offering payment holidays head to coronavirus: what it means for your mortgage, credit card, loan and savings and check out the latest coronavirus news and advice from Which?
A free newsletter from Which? Money Compare offering unmissable news, deals and money-saving tips delivered to your inbox every week, along with information about Which? Group products and services
What is a payment holiday?
A payment holiday is a deal between an individual borrower and their lender to pause regular borrowing repayments for a set period of time.
On 17 March, the government announced that homeowners who are up to date with their payments can apply for a three-month payment holiday on their mortgage. A day later, this policy was extended to landlords with buy-to-let mortgages.
As the coronavirus pandemic has progressed and the impact on household finances worsened, further interventions have been needed.
In April, the FCA proposed a range of temporary measures it felt lenders could offer to support borrowers. These included a temporary payment freeze on loans and credit cards for those facing financial hardship as a result of coronavirus.
Arranging a payment holiday or a payment reduction means your account won’t fall into arrears and should give you time to get back on your feet.
However, some may be worried about the impact on claiming this relief could have on their credit report.
Will a payment holiday impact your ability to borrow in the future?
Payment holidays may not necessarily show up on credit reports or dent your credit score, as discussed below, but there are ways lenders could see that you’ve taken one.
That’ because your record will continue to be updated during the agreed payment holiday and will show the latest balance each month.
Lenders take into account your overall debt level and how much of your credit you use on your cards when they are assessing your affordability. So if large debts have built up, depending on their individual policies, you could find it more difficult to take on new borrowing.
Lenders can also use Open Banking to see whether people have temporarily stopped making payments in the past, thereby indicating whether they have taken a payment holiday. MoneySavingExpert’s Martin Lewis heard directly from the FCA that this may be taken into account as part of a lender’s assessment of a credit application.
Nevertheless, this new measure should help to reduce some of the worst damage and if you think you are going to struggle to make repayments. It’s much better to agree to a payment freeze than simply stop paying as that will have a severe and immediate effect on your credit score.
Will a payment holiday impact your credit score?
The FCA says lenders should ensure the temporary measures don’t impact credit reports and scores.
Meanwhile, the UK’s three main Credit Reference Agencies (CRAs) have pledged to protect credit scores during the COVID-19 pandemic.
Experian, Equifax and TransUnion have agreed to an ‘emergency payment freeze’, with new guidance which ensures an individual’s credit score is not affected over the duration of the agreed payment holiday.
The emergency payment freeze can apply to mortgages, loans, credit and store cards plus catalogue credit, and will cover a payment holiday as well as reduced payments or increased credit limits.
How will a payment holiday look on your credit report?
Because you’ve agreed to a payment holiday with your lender, the payment status in your record with that lender won’t change.
So if your account was up to date, it will still appear that way. If it was in arrears, it will continue to show in arrears but it won’t get any worse.
Importantly, you will not be shown as having missed payments or as having built up arrears – things which can damage your credit score.
Nor will an agreed payment holiday be recorded either for that lender or anywhere else in your overall credit report.
So a payment holiday could help lessen or smooth out the effect of temporarily not being able to pay back borrowing for those who otherwise are financially stable.
How to protect your credit score when using a payment holiday
To ensure your credit report and score are safeguarded you should take these steps:
- Ensure you continue to make regular payments until you have discussed your position with your lenders.
- Agree with your lender whether you should use a payment holiday, lower payments or raise credit limits.
- Agree the length of time the special measures should last. It could be up to three months.
- Once you have this agreement in place, Experian, Equifax and TransUnion will apply the ’emergency payment freeze’ to the relevant credit record on you.
- Ensure you have an agreed ’emergency payment freeze’ with each and every one of your lenders whom you might not be able to pay before you reach the stage of missing a payment. If you miss a payment, you could damage your score.
- Check your credit report and score every month and if you spot mistakes or arrears building up while a freeze was agreed, contact the lender first. If that doesn’t resolve the situation, you should contact the CRA.
It’s vital that you don’t just cancel direct debits as that can result in a missed payment being recorded on your report. A missed payment can take 130 points off your Experian credit score.