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Will a payment holiday affect my credit report?

Through the cost-of-living crisis, some people have turned to payment breaks on their mortgage, credit cards or loans to get them through a difficult patch financially. But does taking a payment holiday affect your credit score and will it hinder your future chances of borrowing?

Through the cost-of-living crisis, some people have turned to payment breaks on their mortgage, credit cards or loans to get them through a difficult patch financially. But does taking a payment holiday affect your credit score and will it hinder your future chances of borrowing?

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
4 APRIL 2024
6 min read
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What is a payment holiday?

A payment holiday is a short break from paying back a debt, like your mortgage or credit card. It can also be a temporary reduction in your monthly payments. It’s sometimes referred to as a ‘payment deferral’. A payment holiday needs to be agreed with your lender.

It’s important to know that you do still have to pay back the money you owe at some point and interest may continue to mount up. At the end of the payment holiday you could owe more than before. So your repayments could be higher than before the holiday. It could also potentially affect your ability to get credit in future. So payment breaks should only be taken when absolutely necessary.

And if you won’t be able to resolve your debt problems during a payment holiday, it’s a good idea to get free and impartial debt advice so you can see what options are available to you.

Why would you need to take a payment holiday?

A payment holiday can help you get back on your feet if you’re struggling to keep up with your regular bills. You may be experiencing a short-term cash-flow problem or a temporary change to your personal circumstances. Legitimate reasons for needing to take a payment break can include:

  • Redundancy
  • A reduction in working hours
  • Maternity or paternity leave
  • Unexpected household or car bills.

The criteria for allowing a payment holiday will vary from lender to lender. Your lender will make a decision based on your situation and will normally come to a decision quite quickly.

While a payment holiday can be useful in the short term to provide financial relief, it’s not a suitable option if you can’t afford your monthly repayments because your household income has dropped permanently or your outgoings and bills have increased significantly – for example, because of increased mortgage costs. If this is the case, you need to speak to your lenders about longer-term support or alternative options.

Did you know?

The cost-of-living crisis has meant more people are struggling with paying off loans. The Financial Conduct Authority has revealed that 10.9 million were falling behind in their repayments in 2023 compared with 7.8 million in 2022.

How do you apply for a payment holiday?

You’ll need to talk to your lender to get approval for a payment holiday. You shouldn’t just stop making payments on your credit card, mortgage or loan.

You’ll need to discuss your financial situation with the lender and explain why you need the holiday. They’ll typically ask you to fill in some forms about your income and expenditure. They’ll probably have some eligibility requirements too.

The MoneyHelper guide on talking to your creditor can help you if you’re worried about what to say.

How a payment holiday can impact your credit score

Although an agreed payment holiday is not recorded as a missed payment, it will usually appear on your credit report and this could affect your credit score. It may also appear as a gap in payments and lenders may assume you had a payment holiday.

If you have a payment holiday as part of tailored support, this is likely to be recorded on your credit file as a temporary arrangement. An ‘arrangement flag’ will remain on your report for three years after the repayment plan ends. 

However, if you cancelled your direct debit or failed to make a repayment on the usual date without first agreeing this with your provider, it will be recorded as a missed payment on your credit report. This could impact your credit score and will remain on your credit report for six years. Plus, your lender could charge you fees for late or missed payments.

If your lender agrees to provide you with extra support, they should tell you what this will mean for your credit score. If they haven’t done this, just ask so you know what the effect will be.

Payment holidays that were offered due to COVID-19 (between 17 March 2020 and 31 July 2021) won’t appear on your credit report. But there may be other ways that lenders will be able to see that you took a payment holiday from additional information they have about you.

Top tip

Check your credit file regularly to make sure your lender hasn’t reported missed payments by mistake while you were on a payment break.

Will paying off a payment holiday improve my credit score?

It could help, as lenders want to see that you can manage your repayments.

If you were behind with your payments before you took out your payment holiday and you’ve since made overpayments, this could improve your credit status. But it may depend on the level of debt, the amount paid and how long ago this happened.

Will a payment holiday affect future credit applications

It could. Lenders could view you as having financial issues that might make them less willing to lend to you.

If you’ve recently taken an agreed payment holiday and are about to apply for a mortgage, the best thing to do is speak to lenders directly before you apply. Ask them whether your payment break might affect your application. If that’s the case, it might be worth holding off for a while then applying once your finances improve.

What happens when my payment holiday ends?

Your lender will be in touch with you before your payment break ends to tell you what will happen next.

Mortgages – your lender may recalculate your monthly payments and spread any payments that you deferred over the outstanding term of your mortgage. This means your payments will increase. Or they may agree to extend your mortgage term so your payments remain the same, or switch you to interest-only repayments to help you manage your finances (but this will mean you’ll need to consider how you’ll repay the capital in the future).

Loans – your monthly repayments may go up to cover the missed payments and interest charged during the payment break. Alternatively, your lender may agree to extend the term of your loan, so your monthly repayments don’t rise.

Credit cards – your monthly minimum payment will increase to account for the extra interest that hasn’t been paid. 

If you get to the end of a payment holiday and you’re comfortable with your payments restarting again, you’ll need to:

  • Check your direct debits – your lender will normally have stopped them and will restart them again at the end of the payment holiday
  • If you cancelled your direct debit or standing order, you’ll need to set up the direct debit again.

If your payment holiday has ended but you still need help

  • Talk to your lenders again and see what they can do to help you
  • Talk to a debt adviser to work out a plan to get your budget and debts back on track. If you’ve been talking to your lender, they should also suggest where you can get good debt advice.

Alternatives to payment holidays

Lenders typically would prefer to come to an agreement that will allow you to continue paying your mortgage or loan at a reduced rate, but over a longer period. It’s important to talk to your lender as soon as possible about an alternative solution.

Lenders should also offer borrowers in financial difficulty tailored support that takes account of their individual circumstances. Talk to your lender and see what they can offer.

Some of the other ways you can ease the pressure on your finances without taking a payment holiday include:

  • Finding a lower rate – you could remortgage to a lower interest rate to reduce your monthly payments. But you’ll need to take into account any arrangement fee for doing this and you’ll be charged an exit fee if your existing mortgage hasn’t come to the end of its term.

    You could move your outstanding credit card balance to a 0% balance transfer card, where you don’t pay any interest for an introductory period. There may be a one-off transfer fee to pay, and if you miss a payment you may lose the 0% rate and have to pay a penalty.
  • Extending the mortgage term – you may be able to extend the length of your repayment agreement. This means you’d pay less each month but over a longer period of time. But you’d pay more interest overall.
  • Getting an interest-only loan – this is where you only pay the interest on the amount you’ve borrowed each month. Moving to this type of repayment plan could reduce your payments in the short term. But because you aren’t paying off the capital, you’ll end up paying more interest over the length of the loan. And you’ll need to find a way to pay back the capital at the end of the loan. You’d have to meet strict criteria to be offered this.

If you need more help: Breathing Space – the Debt Respite Scheme 

Breathing Space is a government scheme designed to give someone with problem debts the right to legal protections from creditor action for 60 days, or potentially longer for someone with a mental health crisis.

To be eligible for the Breathing Space scheme, you need to be referred by a debt adviser or local authority. The scheme freezes most interest and fees on debt, and pauses debt enforcement. You’ll need to work with the debt adviser to help find ways to manage your situation.

Frequently asked questions

Are payment holidays and mortgage holidays the same?

Payment holidays have traditionally applied mainly to mortgages. But you can ask for a payment holiday on a credit card, personal loan, store card or car finance.

If you can’t keep up your payments on any kind of borrowing, talk to your lender to see what help is available for you based on your personal situation.

What should I do if I’m worried about my finances?

If you’re concerned about making payments on your mortgage, credit card or loan, contact your lender as soon as possible and be honest about your situation. They should provide you with individual support and help you find a suitable solution.

The worst thing you can do is miss a payment, as this could stay on your credit report for six years and have a negative impact on your credit score.

You can also get free, independent advice from a debt charity like StepChange or National Debtline.

Can I still use my credit card if I have a payment holiday?

Being granted a payment holiday will not impact your ability to use your credit card. But card providers can suspend card use in accordance with their usual business practices. So, they make ask you not to use your card during the payment holiday and will advise you if they suspend your card.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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