Does Forbearance Hurt Your Credit? A Comprehensive Guide to Forbearance and Credit Scores

During hard times, loan forbearance—a temporary reduction or suspension of payments in response to a borrower’s temporary hardship—can help maintain household cash flow. It can also have significant impacts on your credit history and credit scores.

Borrowers looking for relief from financial hardships have historically had the option of forbearance, though lenders have traditionally been selective in granting it. Usually, they won’t approve forbearance until after doing a financial assessment to determine whether the borrower will be able to start making regular payments after the forbearance period has ended.

As we’ll see below, one significant exception to this rule is the student loan issuers, who are legally obligated in certain situations to provide payment forbearance and even to permit interest-free loan payment deferral.

Many people are eligible for forbearance today due to the COVID-19 pandemic’s upheaval and uncertainty. Many lenders, including those who issue credit cards, mortgages, and student loans, are actively offering borrowers forbearance arrangements thanks to encouragement from federal and state agencies. In even better news for worried families, some creditors are even offering outright deferment on payments.

For a maximum of 12 months, the lender consents to accept lower payments or no payments at all under a forbearance agreement. The borrower is required to start making regular payments again at the conclusion of the forbearance period and repay the amount they were exempted from paying during that time, along with interest and any applicable fees. Repayment may be made in full or in up to twelve equal installments added to the regular monthly payments.

A loan deferment simply suspends payments for a predetermined period of time; upon the end of the deferment period, loan payments resume as previously, with no further interest or fees due and no repayment obligations.

Forbearance, a temporary suspension or reduction of loan payments, can be a lifeline during times of financial hardship. However, many borrowers worry about the impact of forbearance on their credit scores. Let’s delve into the intricacies of forbearance and its potential effects on your creditworthiness.

Understanding Forbearance: A Helping Hand in Tough Times

Forbearance offers a temporary reprieve from loan payments, allowing borrowers to catch their breath and regain financial stability. This can be especially helpful during unforeseen circumstances like job loss, medical emergencies, or natural disasters.

Types of Forbearance:

Deferment: Payments are postponed, and no interest accrues during the deferment period.
Forbearance: Payments are reduced or suspended, but interest continues to accrue.

Eligibility for Forbearance:

Eligibility varies depending on the lender and the type of loan.
Contact your lender to inquire about their forbearance programs and eligibility requirements.

Impact of Forbearance on Credit Scores:

Generally, forbearance does not negatively impact credit scores.
However, some lenders may report forbearance to credit bureaus, which could potentially affect your credit score.
It’s crucial to check with your lender to understand their reporting practices.

Tips for Minimizing the Impact of Forbearance on Credit Scores:

Get a forbearance agreement in writing.
Make sure the agreement specifies whether forbearance will be reported to credit bureaus.
Continue making payments if possible, even if they are reduced.
Monitor your credit reports regularly and dispute any errors.

Forbearance and Credit Scores: A Closer Look

Although forbearance usually has no effect on credit scores directly, there are a few things to keep in mind:

Payment History: Forbearance typically appears as “current” on your credit report, which is positive. However, missed payments before entering forbearance could negatively impact your score.
Credit Utilization: If your credit utilization increases due to missed payments, your credit score could be affected.
Length of Forbearance: Prolonged forbearance periods might raise concerns about your ability to repay the loan, potentially impacting your score.

Additional Resources for Forbearance and Credit Scores

Forbearance can be a valuable tool during financial difficulties, but it’s essential to understand its potential impact on your credit score. By staying informed, communicating with your lenders, and managing your finances responsibly, you can navigate forbearance while minimizing its effects on your creditworthiness. Remember, forbearance is a temporary solution, and it’s crucial to develop a plan to get back on track with your loan payments as soon as possible.

What Does Forbearance Mean for Student Loans?

In contrast to mortgage lenders, who typically grant forbearance on an individual basis, federally backed student loan issuers incorporate forbearance clauses into their loan agreements.

There are two types of student loan forbearance:

General forbearance: Your lender or loan servicer may decide to grant you general forbearance if you are experiencing financial hardship, excessive medical expenses, unemployment, or a substantial drop in income. If you meet the requirements, you may receive reduced or suspended payments for a maximum of 12 months. Following that, you may ask for another forbearance. Certain programs have a three-year maximum forbearance period over the course of the loan.
Required forbearance:
Servicers of federally backed student loans must grant your request for forbearance if your loan payments are greater than 2020% of your monthly gross income. You are enrolled in a residency or internship in medicine or dentistry. You serve in AmeriCorps or similar volunteer-based programs. You are a teacher who qualifies for student loan forgiveness. You participate in the Department of Defense’s loan repayment program or are a member of the National Guard.

If a borrower has federally subsidized student loans, they may also be eligible for loan deferments due to qualifying for college, employment, military service, or financial hardship. Although deferment can be more challenging to obtain than forbearance, it is still a viable option that merits consideration because, in comparison to a forbearance agreement, it can result in significant interest savings.

Credit Card Forbearance and Credit

It’s possible, but unlikely, that your credit report will contain any negative entries if your credit card lender approves your request for forbearance and you make your agreed-upon payments (such as making your reduced minimum payment each month or starting payments after missing the agreed-upon amount).

However, by raising your credit card’s balance and utilization rate, credit card forbearance can negatively impact your credit score inadvertently.

Your credit score will likely suffer if you don’t start making regular payments after your card issuer extends forbearance because the lender will impose a repayment plan and eventually close your account, which will be recorded in your credit report.

NEW Forbearance and Credit Score Update

FAQ

Is there a downside to forbearance?

Find out from your lender or servicer which type of loan you have and what the forbearance terms are. Stopping payments before you’ve officially been granted forbearance could make you delinquent on your mortgage and have a serious negative impact on your credit history.

Does forbearance negatively affect credit score?

Forbearance itself doesn’t have a direct impact on your credit score, as long as you keep up with your payments as agreed (i.e., making reduced minimum payments or resuming regular payments once forbearance is over).

What is forbearance credit risk?

Forbearance includes concessions that are granted due to the counterparty’s financial difficulty on any exposure in the form of a loan, a debt security or an off-balance sheet item (eg loan commitments or financial guarantees), regardless of the measurement method for accounting purposes.

Is it better to get a deferment or forbearance?

The main difference between deferment and forbearance is that interest always accrues when you’re in federal forbearance, while deferment is interest-free in some cases. Generally, the question of whether to request forbearance versus deferment comes down to which you qualify for.

How does forbearance affect credit?

The impact of forbearance on your credit may differ by loan servicer and loan type. Student loans: If you abide by the terms of a student loan forbearance agreement, the loan will remain listed in good standing on your credit reports.

Does mortgage forbearance hurt your credit score?

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?

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 student loan forbearance affect my credit report?

Student loans: If you abide by the terms of a student loan forbearance agreement, the loan will remain listed in good standing on your credit reports. Mortgages: Your lender can report your account to the credit bureaus as in forbearance or “paying under a partial payment agreement.”