Understanding Payment Deferrals And Credit Scores During COVID-19

If you are experiencing reduced or limited income, you could be finding it hard to make monthly payments on time. However, defaulting or missing a due-date can cause a big problem down the road as payment history makes up 35% of your credit score. As a way to provide support during the coronavirus pandemic, big banks, lenders and governments are offering financial relief to help those struggling to make payments due to COVID-19.

What’s a payment deferral program?

Deferral programs allow you to delay your payment to a future date and are meant as a short-term measure if you're experiencing financial hardship. Although a mortgage deferral is the most common, deferral requests can also be applied to bills, auto loans, line of credit, credit cards or other types of loans.

It’s important to understand that this doesn’t mean your balance is ‘on hold’ or you’re getting ‘free money.’ You will be increasing your debt as interest will continue to accrue during this period and the extra amount will be added to the outstanding balance.

You may need to contact your lender and apply, it won’t happen automatically. It may also be possible that there are qualification requirements.

Is it a good option?

Deferring payments may not be the best option for you. Before you make any decisions, make sure you've made a short-term budget and have an idea of government supports available. If you think you can reasonably manage your monthly bills, you may want to try and maintain your payment schedule.

Be prepared for potential costs

Depending on the program offered, a lender could be loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on top of that loan - this means you could have a higher outstanding balance.

It’s a good idea to ask your lender what happens ‘after’ the period ends so you understand the ‘real’ cost. 

Credit card deferrals

Currently, institutions are lowering their interest rates on credit cards or offering up to six-month deferrals. Remember, once this period ends your future credit card payments will include all accrued interest, meaning the minimum payment due could increase significantly. It's important to check with customer service and ask for details about what they are offering in terms of relief.

Can refinancing help?

If you are trying to reduce your monthly payments, you may want to look at refinancing or debt consolidation. This could allow you to extend the amortization period or get a lower interest rate. You can read more about refinancing here.

It’s possible you will have to pay penalties and fees, but if you’re struggling to make payments it’s in your best interest to plan ahead, it will benefit your financial health in the long-term. Keep in mind that refinancing could require a full credit application. 

You can sign-up or login to access your free credit report, it won't impact your score to check. You can also get personalized tips to improve, which could help you get a better interest rate and increase your options when it comes to financial products. 

Does deferring a payment impact your credit score?

During the COVID-19 pandemic, Equifax has said they are working with lenders so deferred payments don’t impact your credit profile. Specifically, if companies or lenders implement a payment deferral program, then Equifax has asked that they do not incorrectly report missed payments to credit bureaus that could negatively impact profiles.

However, as lenders are seeing a record number of requests on a 'case-by-case' basis and there is a chance that mistakes and errors might occur. 

How to protect your credit score

1. Create a budget and check supports to see if you can manage your payment schedule. 
2. If you chose to move forward, make sure you document the details when you arrange the deferral payment (date and name of the customer support representative). 
3. Ensure you request confirmation that the payment has been deferred (preferably electronically).
4. Check your payment calendar to ensure your deferral is reported correctly. Watch your credit report so you can spot any errors and report them as soon as possible. 

The Bottom Line

Contact your lender and ask what they’re doing to help during COVID-19. By speaking with them directly, you can negotiate a plan that works for you. Whatever decision you make, be sure to be vigilant and monitor your credit report.