Many of us are feeling the pinch and are turning to payment holidays to make it through this difficult time. So we find out if a payment break has any impact on your credit score.
This article is correct at the time of writing but is subject to change.
What is a payment break?
An arranged payment break is where your lender agrees to give you a break from making payments on your finance agreement. The lender will use their own guidelines to decide if it is the best option for you.
You can request a full break or a reduced payment break, but interest continues to accrue in the background either way.
The Financial Conduct Authority (FCA) has advised firms should be offering a three-month payment holiday to those in need - on credit cards, loans, mortgages and car finance. These breaks are specifically designed to help people in financial difficulty due to COVID-19.
The deadline to request a payment break (or a payment break extension) is 31 October 2020. Lenders need only grant payment holiday where it’s a suitable solution (depending on your circumstances).
An alternative solution may involve setting up a long term payment plan, reducing or waiving interest or being referred to a debt charity for more advice.
Will a payment break impact my credit score?
Taking an agreed payment holiday should not have a negative impact on your credit score in itself. But this doesn’t mean that your score can’t change due to other factors.
If you can’t afford to maintain your repayments you must update your lender as soon as possible. If you stop or reduce your repayments without speaking to them first, you could face late fees, and missed payments could show up in your credit report, which may impact on further lending. Your credit score could also suffer, and missed payments could lead to potential default action.
In normal circumstances, missed mortgage repayments could put your house at risk of repossession. However, due to the coronavirus pandemic, mortgage repossession has been temporarily suspended (currently until 31st October 2020 - this may be subject to change).
Also, a payment break could have a knock-on effect on your credit score. For example, your repayments may increase after your payment break ends (to account for the missed payments, plus interest). If you’re not careful, this could lead to a missed payment, knocking around 130 points off your credit score. Three to six missed payments could result in a default, which would reduce your score further. Lenders could see this as a potential red flag.
You’d need to check with your lender how they expect you to catch up with your loan, credit card, car finance or mortgage payments after the payment freeze ends. They may extend your loan instead of bumping up the repayments, but this could increase the amount of interest you pay overall.
Tip: Check your credit report on a regular basis. There’s a small chance your lender may report missed payments on your credit file in error when you’re on a payment break. If this happens, you need to ask them to remove any incorrect information that could harm your credit score. Or you can contact one of the three main credit reference agencies in the UK (Experian, Equifax or TransUnion) to deal on your behalf.
Can a payment break affect my ability to get future credit?
Yes, it can. A payment break won’t leave a mark on your credit file or reduce your credit score in itself. But it may affect future lending decisions and your ability to get credit.
When you make a credit application, lenders might ask to check your bank statements and credit report. Any gaps in your income and outgoings could give them the impression that you’re struggling with money, which may put them off lending to you.
However, it is better to take an arranged payment break than to just stop making payments. So if you are struggling, it’s best to discuss your options with your lender.
The FCA state there should be “no long-term negative impact on your credit file if you are able to get back on track at the end of a payment freeze or a mortgage payment holiday.”
Check your eligibility before you apply
Whether your credit application is accepted depends on a number of factors, not just your credit score. Lenders will look at your income, level of debt and payment history as well, for example.
They each use their own criteria, so we suggest you use an eligibility calculator to check if you’ll be approved before you apply. A calculator only performs a soft search on your credit file, so you can use it as many times as you like – without being visible to other lenders and negatively impacting your credit score.
What about my overdraft?
On a side note, several banks are also offering interest-free periods on overdrafts. The FCA states that customers facing financial difficulty due to Coronavirus can request an overdraft up to £500 with no interest for 3 months.
Banks were going to introduce flat interest rates of around 40% for both planned and unplanned overdrafts in April. These measures were temporarily delayed due to Coronavirus, but have now been given the green light by the FCA.
Despite this change to interest rates, those struggling financially will still be able to request support from banks during this time. The deadline to request a freeze on interest remains the same, 31st October 2020.