Will a payment holiday affect my credit report?

Throughout the pandemic, many 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?

Throughout the pandemic, many 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?

Anelda Knoesen
From the Money team
6
minute read
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Posted 30 SEPTEMBER 2021

What is a payment holiday?

A payment holiday is a short break from paying back a debt, like your mortgage or credit card. It may also be called 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 accrue. So payment breaks should only be taken when absolutely necessary.

Payment holidays have been around for years but were well and truly thrust into the limelight in March 2020, as one of the economic support measures announced when the coronavirus outbreak struck.

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 bills

While a payment holiday can be useful in the short term to provide financial relief, it’s not really a suitable option if you can’t afford your monthly repayments because your household income has dropped permanently. If this is the case, you need to speak to your lender about longer term support.

Payment holidays during COVID-19

Payment holidays were among the raft of financial support measures put in place by the government in March 2020 to help people struggling to meet their monthly payments because of the impact of coronavirus.

And millions of people made use of them. In fact, one in five adults with a credit or loan product took a payment holiday between March and October 2020, according to a report by the Financial Conduct Authority (FCA). That included 3.2 million people who took up a mortgage holiday.

Although applications for coronavirus-related payment holidays closed on 31 March 2021, you can still ask your lender for individual support. This could include a payment arrangement or a break from payments to give you some breathing space to deal with your debts.

How a payment holiday can impact your credit score

If you took an agreed payment holiday because you were hit financially by COVID-19, it shouldn’t be recorded as missed payments on your credit file, says the FCA. This means your credit score will be protected. That’s as long as you’re able to get back on track with your monthly payments and your account was up to date before you took your payment holiday.

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 have been recorded as a missed payment on your credit report.

Now that the payment holiday deadline has passed, lenders will typically offer ‘tailored support’. If you have a payment holiday as part of tailored support, this will 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.

If your lender agrees to provide you with extra support, they should always tell you what this will mean for your credit score.

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?

The first six months of a payment holiday shouldn’t be reported as missed payments on your credit file, so paying it off is unlikely to have any impact on your credit score.

But 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 and amount paid.

Will a payment holiday affect future credit applications

It could. While a temporary payment holiday won’t dent your credit score, several payment holidays could have an impact. It’s worth checking with your lender to see if they’ll report any subsequent payment holidays to Credit Reference Agencies (CRAs) - who hold details of your credit record.

You should be aware that credit files aren’t the only source of information that lenders use when deciding whether to let you borrow money. When you make an application for credit, the lender might also ask to check your bank statements. Any gaps in your income and outgoings may suggest you’re struggling with your finances. Red flags like these could put providers off lending 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.

Alternatives to payment holidays

There are other ways you can ease the pressure on your finances without taking a payment holiday.

  • Find 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.
  • Extend 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 – and you’d pay more interest overall.
  • 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 save you a lot of money in the short term, but it won’t reduce the amount you’ll have to pay overall. And you’d have to meet strict criteria to be offered this.

Frequently asked questions

Are payment holidays and mortgage holidays the same?

Payment holidays have traditionally applied to mortgages, but under the FCA’s coronavirus measures, you could ask for a payment break on credit cards, personal loans, car finance, rent-to-own, store cards and pawnbroking.

The coronavirus emergency payment holiday scheme ended on 31 March 2021, but mortgage payment holidays might still be available in certain circumstances. Be aware that payment holidays not related to coronavirus will show up on your credit file and might affect your credit score.

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 – in most cases, your lender will recalculate your monthly payments and spread any payments that you deferred over the outstanding term of your mortgage. If you have the money available, you can make an overpayment to reduce your overall mortgage balance.

Loans – like mortgages, your monthly repayments will go up to cover the missed payments and interest charged during the payment break.

Credit cards – your monthly minimum payment will increase to account for the extra interest that hasn’t been paid. If you had a direct debit set up before your payment holiday, it should automatically be reactivated.

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.

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