Forbearance and Your Credit

If you’re struggling to keep up with your bills and loans, you have options. Depending on your loan, your lender may have a financial hardship plan available to make your payments more manageable. Every lender and product is a little bit different. At first glance, it may seem confusing, but don’t let that stop you from reaching out for help. Below we break down loan forbearance, a popular loan accommodation option, so you can feel more prepared when you talk to your lender.

What is forbearance?

Forbearance is a type of financial accommodation that may be offered by a lender. It often describes a temporary change in payment terms for your account. This change can be negotiated with your lender and may include suspended or reduced payments.

Lenders may offer payment alternatives to financially strapped customers on student loans, mortgages, car loans, credit cards and personal loans, among others.

Forbearance vs. deferment

Lenders may use the terms forbearance and deferment interchangeably. Whatever terms they use for their financial assistance programs, you want to make sure you clearly understand how your loan will change, how it will be reported to credit reporting agencies and what your repayment options are when the assistance period ends.

The type of assistance offered will depend on your type of loan, your lender and your financial situation. Federal student loans, for instance, offer both deferment and forbearance options with specifically defined terms. Auto loans can have a variety of repayment options, which can include temporary payment pauses, skipped payments and due date changes. The Consumer Financial Protection Bureau provides tips on how to work with your lender to avoid falling behind on your auto loan.

Mortgage forbearance

Mortgage lenders may offer forbearance plans that allow you to pause payments. They might also offer mortgage loan modifications as a form of assistance. Modifications change the terms of your loan by adjusting the interest rate, the length of your loan or a combination of both, which can result in lowering the monthly payments.

How can I get loan forbearance?

You don’t have to wait for your lender to contact you to enroll in a financial accommodation plan. Contact companies you have accounts with as soon as you can. It’s best to contact your lender before you miss a payment. Your payment history is one of the most influential credit score factors, so try to get ahead of a potential missed payment and work out a plan with your lender ahead of time. Even if you’ve already missed one, you could still benefit from reaching out before you miss any more.

Every lender is different, and each likely has their own terms and eligibility for their financial hardship programs. You may be required to provide proof of hardship such as recent bank statements or medical bills. If you’re worried about how you’ll repay missed or partial payments, don’t let that stop you from talking to your lender about options. Explain your financial situation and get clear descriptions of the accommodation terms. This can help you agree to a manageable plan for your situation.

How financial hardship accommodations may appear on your credit report

It’s up to each lender to decide how they will report financial hardship accommodation plans to the credit reporting agencies. If you’re eligible for forbearance, your lender or creditor may report your account as active, but with a new, agreed-upon payment due. This could be $0. If that is the case, your current balance will show in the “Balance” field. However, the “Terms” field would state there is no payment currently due.

Below are a few other common ways financial hardship plans may appear on your credit report:

You can get your free credit report from TransUnion and the other credit reporting agencies each week. Visit AnnualCreditReport.com to get your report.

Does forbearance affect credit?

If a financial hardship plan, like a loan being in forbearance or deferment, is reported to the credit agencies, it can have an impact on 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. If you’re focusing on paying primary bills like your rent, mortgage or auto loans and the balances on your credit cards increase, a high utilization could lower your credit score until the balances are paid down.

Repayment after forbearance is over

Forbearance is usually temporary, so when it is over, you’ll have to repay the missed payments. This may mean your payments are higher when the repayment period begins. Or, you may have additional payments added to what would otherwise be the end of your loan. These terms will be discussed prior to agreeing to your plan and in your forbearance application.

Prepare for the end of your forbearance plan the best you can. This may mean making changes to your monthly budget. If you’re able, the month or two before your forbearance period ends, try a practice run, stowing away what will be your new loan payments into a savings account to see how it impacts your finances each month. Not only will this help build your emergency savings account, but it can show you whether the new payments are feasible and if you need to explore other options to meet your obligations.

Managing debt, especially if you suffered an unforeseen hardship, can feel like a constant, tiresome shuffle as you try to make the best decision possible to best manage your financial future. There is help available. Make sure to keep consistent contact with your lenders with any questions or problems you have. Consider speaking with a free credit counselor if you’re worried about your financial situation.