Loan forbearance can be a great relief during times of struggle and need, but as with any agreement, it is important to understand what is forbearance as well as the difference between deferment vs. forbearance.
Unsettling times are likely to happen to all of us at some point in our lives, whether they’re caused by global or national economic problems, personal or family emergencies, or job worries that put us out of work temporarily or permanently. These unexpected times often leave us facing financial challenges and leaving us struggling to keep up with bills, including rent, utilities, cell service and insurance premiums.
In these times its important to talk to your creditors and lenders about debt repayment options. You might be able to choose forbearance, which is an agreement with a lender or creditor that lets the borrower put off or stop loan payments for a certain amount of time.
Sometimes people use the term forbearance meaning deferment or deferred payments, but there can be differences in forbearance vs. deferment agreements.
Does Forbearance Hurt Your Credit?
At some point, many of us will have trouble paying our loans because we don’t have enough money. Missing or delaying payments can hurt your credit if you can’t make them because of things like losing your job, medical bills, or other unplanned events. Forbearance may seem like a good way to take a short break from payments when times are tough. But it’s important to know how a forbearance agreement can hurt your credit before you sign it.
What is Forbearance?
Forbearance allows borrowers to temporarily pause or reduce loan payments for a set period of time It does not erase what you owe, but rather allows you to delay payments until you are able to start paying again Forbearance is typically granted for up to 12 months, but extensions may be possible in some cases.
Forbearance is available for federal student loans, mortgages, credit cards, and other types of debt. Eligibility and terms vary by lender. With federal student loans, forbearance is available when you can demonstrate financial hardship. Most private student loans and mortgages also offer discretionary forbearance programs.
Forbearance vs. Deferment
While forbearance and deferment both allow you to temporarily postpone payments, there are some key differences:
-
With deferment, interest typically does not accrue on federal student loans and some mortgages Under forbearance, interest continues to accumulate
-
The lender decides whether to grant forbearance or deferment. Deferment may happen automatically if the borrower meets certain criteria.
-
Forbearance may be available for a wider variety of loan types compared to deferment.
-
More time may be given for deferment; for federal student loans, this is usually three years. The maximum length of forbearance is generally 12 months.
How Forbearance Can Impact Your Credit
Forbearance gives you relief from making payments in the short term. But depending on the type of loan and how your lender reports the modified payment status, it can negatively impact your credit in the long run.
-
Your payment history can be affected – If your loan servicer reports your payments as delinquent or late while you are in forbearance, it can significantly drag down your credit scores. Missed payments remain on your credit reports for 7 years.
-
Increased interest – Since interest continues to accumulate during forbearance, your loan balances will be higher when regular payments resume. Higher credit utilization rates tend to lower credit scores.
-
Credit checks—Asking for forbearance usually involves a credit check, which shows up as a hard inquiry on your credit report. Too many inquiries in a short amount of time can hurt your credit.
-
Eligibility for other credit – Lenders may view forbearance negatively in evaluating applications for mortgages, auto loans and other types of credit. It can make you appear as a higher credit risk.
-
Length of credit history – Since forbearance allows you to skip payments, those months don’t count towards your length of on-time payments. This factor can shorten your established credit history.
How Different Loans Are Impacted
-
Federal student loans – Forbearance is structured into federal loan programs, so your credit is typically not affected as long as you adhere to repayment terms.
-
Private student loans – Impacts vary. Some lenders continue to report loans as current during forbearance while others report them as delinquent or defer payments. Check with your lender.
-
Mortgages – Mortgage forbearances are generally reported as current as long as agreed terms are followed. But increased balances due to interest may affect your credit utilization.
-
Credit cards – Issuers typically continue to report credit cards as current during hardship programs. Higher balances can increase credit utilization.
-
Auto loans – Loan deferrals allow you to skip payments, which are added to the end of the loan term. This keeps payment history positive but results in higher balances.
-
Personal loans – Lenders may report loans as current during deferment if terms are met. But increased interest can raise credit utilization if balances grow.
Strategies to Minimize Credit Damage
If you need payment relief, consider these tips to help reduce impacts to your credit:
-
Ask lenders how they report modified payment programs – Confirm that your payment status will still be reported as current during forbearance.
-
Pay what you can – Making partial or reduced payments shows good faith effort and keeps accounts current.
-
Avoid unnecessary spending – Minimize balance increases by limiting discretionary purchases that add to your debt.
-
Pay down balances before forbearance ends – Work to pay down balances as much as possible before regular payments restart. Lower balances help minimize credit utilization impacts.
-
Rebuild credit history – After forbearance, focus on timely payments to start rebuilding your credit payment history.
-
Limit credit inquiries – Only apply for credit if absolutely necessary while in forbearance to avoid unnecessary inquiries.
The Bottom Line
Entering into forbearance is not necessarily damaging to your credit, particularly if you continue meeting payment obligations to the extent possible. However, missed payments, higher balances, and other potential side effects can negatively impact your credit if you are not careful. By understanding the risks and taking steps to minimize credit impacts, you can strategically use forbearance to make it through hard times without compromising your credit health in the long run.
Talk to your lenders and creditors for definitive information on forbearance/deferred payments
Eligibility requirements vary depending on the type of debt you wish to request forbearance for, and each lender and creditor has its own programs and rules. For more information on setting up forbearance, or to learn more about the options available to you, including choices outside of forbearance, contact your lender or creditor directly.
Remember, you cant just miss a payment and expect no repercussions without communicating with your lender about your situation. Youll need to work out an agreement with your lender before stopping payments — otherwise, your credit standing could be compromised.
While forbearance may allow you to deal with your short-term financial challenges and help you get back on your feet without jeopardizing your credit scores, it doesnt come without its drawbacks. If you enter into a forbearance agreement, youre not getting “free money”. Depending on the repayment plan you agree to with your lender or creditor, you may need to repay the interest that accrues during your approved deferral period, and late fees may still apply. Ask your lender if youll still be charged late fees, how and when those fees will be applied and how your forbearance agreement will be reported to the Nationwide Credit Reporting Agencies (Equifax®, Experian®, and TransUnion®).
Mortgage forbearance is a program that many mortgage providers or holders offer as an option that allows you to remain in your home while you regain your financial stability, to avoid foreclosure. It is typically a short term program and may include temporarily stopping or decreasing payments, but each financial institution and lender have different programs and qualification requirements. It is important to pay close attention to the terms as while it may provide a decrease in payments or a pause, interest and late fees may still apply.
If you find yourself in a financial situation where you are struggling and will be unable to make your full mortgage payments on time, contact your lender as soon as possible to discuss your options.
Forbearance process: utilities and property taxes
Many cities and states across America offer relief options for utility bills and property taxes to those impacted by unforeseen economic hardships. This may include forbearance or deferred payments. Call your local municipality or utility provider for details.
Does Loan Forbearance Hurt Your Credit? – CreditGuide360.com
FAQ
Does forbearance affect my credit score?
If you abide by the terms of your forbearance agreement, your loan or credit card account will remain in good standing and your credit scores should not be affected. If your student loan is placed in forbearance, that may be noted on your credit report, but it should not impact your credit scores.
Does a mortgage forbearance hurt your credit?
Mortgage forbearance can hurt your credit score if your servicer reports it to the credit bureaus. However, forbearance is an agreement between the lender and the borrower to modify payments. It hurts your credit less than a foreclosure or a string of missed payments. What happens if a loan is in forbearance?.
What happens if a loan is in forbearance?
Here are some examples of how this may play out with common types of loans: Student loans: According to Experian®, if your student loan lender reports the account to the credit bureaus and your account is in forbearance, the loan will likely appear on credit reports in good standing, and late or missed payments may not be reported.
Does a credit card forbearance plan affect your credit?
Credit cards: As long as you keep up with payments as agreed upon with your credit card issuer, it’s unlikely that a credit card forbearance plan will negatively affect your credit. But a forbearance plan could indirectly harm your credit in other ways.
What happens if a student loan is in forbearance?
Experian® says that if your student loan lender reports the account to the credit bureaus while your account is in forbearance, the loan will probably show up on your report in good standing, and any late or missed payments may not be shown.
How much does a forbearance or deferment plan affect your credit score?
How much a forbearance or deferment plan changes your particular score depends on your credit history and the scoring model used. There can be indirect effects on your credit score as well, like if you missed a payment prior to the plan starting or if you fail to repay when the plan expires. Another indirect impact may be other loan balances.
How much does forbearance affect credit?
Entering a forbearance period with your mortgage is unlikely to hurt your credit. While your loan is in forbearance, your lender will report you as current on payments even if you’re not. Again, this is assuming you’re granted forbearance before you pause or decrease your mortgage payments.
What are the downsides of forbearance?
Risk of foreclosure: If for any reason you are unable to make scheduled reduced payments during the forbearance period or repay suspended or partial payments …Oct 1, 2024.