Forbearance (a modified payment plan required by financial hardship or illness) and deferment (a temporary respite from payment obligations) are perhaps best known in relation to student loans, but they’re relevant to mortgages, credit cards and other borrowing vehicles, too. The extent to which they stand to impact your credit score ultimately depends on the type of debt in question, how the lender classifies the arrangement and what you intend to use your credit score for.
You see, neither forbearance nor deferment of student loans is supposed to have any impact on your credit standing. Both will be noted on your credit report, but the major credit-scoring companies (VantageScore and FICO) say such records will carry no negative connotations. However, it’s important to remember that lenders, especially credit-card companies, often use their own proprietary credit scores to evaluate applicants. If their risk algorithms have determined that people with forbearance and deferment have an increased probability of payment problems, you can bet they’ll take that into account — at least the smart ones do.
Student-loan deferment or forbearance could also impact your credit score more directly if you miss a payment right before the arrangement takes effect. This is unfortunately common given that financial problems typically necessitate such modified or suspended payment plans. And if you don’t notice the missed payment, delinquency could fester if you assume you’re in the clear. That would, of course, take a lot of the air out of your credit score.
Mortgages, Credit Cards & Auto Loans:
The circumstances are a bit different for these types of debt. Only deferment is possible when it comes to auto loans, only forbearance applies to credit-card debt, but both can be used in the context of mortgages. In each instance, the credit-score impact will depend on how the account in question is reported as well as the state of your credit standing to begin with.
Mortgages: VantageScore says mortgage forbearance won’t negatively impact your credit score if the arrangement entails paying either interest only or a combination of interest and a reduced principal amount over the prescribed timeframe. But if the agreement calls for no payment to be made during the forbearance period, “the trade line is temporarily excluded from active trade line calculations,” according to Vantage. “This will lower the consumer’s score by 30 to 40 points.” FICO is a bit different. Based on its policies, if a loan servicer reports mortgage forbearance to the credit bureaus “as ‘paying under a partial payment agreement,’ it could have a negative impact on a borrower’s FICO score.”
Credit Cards: Forbearance often goes by the name of “debt management” in the context of credit cards and can include any modified payment agreement. It won’t necessarily affect your credit standing directly. But if it results in a lower credit limit or the closure of your account, it could do so indirectly by altering your credit utilization and average account age.
Still, Federal Reserve Bank research shows that 78% of people whose credit-card accounts are reinstated following default for the purpose of completing a modified payment agreement see their scores rise by as many as 20 points.
Auto Loans: Some auto lenders will allow for the deferment of payments due to hardship, typically for 30 days, with the skipped month being added to the end of your repayment schedule. In most cases, you will still be responsible for paying interest in the meantime. It therefore won’t get temporarily excluded from credit-scoring calculations and shouldn’t hurt your credit standing, assuming the lender properly reports the information to the major credit bureaus.
Given the nuance that’s involved, it’s wise to take a peek at your credit report before and after entering into forbearance or deferment just to make sure everything is in order. Your free WalletHub account will also give you unlimited access to daily credit-score updates, so you can monitor how your modified payment plan impacts your standing.
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