Forbearance and Its Impact on Credit
Loan forbearance, a temporary reduction or suspension of loan payments, can provide financial relief during times of hardship. However, it is crucial to understand its potential impact on your credit history and scores (Capital One, 2023).
Forbearance and Credit Reporting
Forbearance can be reported to credit bureaus by lenders, depending on the type of account and forbearance program (Capital One, 2023). This reporting may affect your credit, as missed or underpaid payments during forbearance can be considered delinquencies (Experian, 2021).
Mortgage Forbearance
Mortgage forbearance can help prevent foreclosure, but missed or underpaid payments during this period may be reported as delinquencies to credit bureaus (Capital One, 2023). Therefore, it is essential to inquire about your lender’s reporting policies before entering into a forbearance agreement.
Credit Card Forbearance
Credit card forbearance options may include reduced minimum payments, skipped payments, increased borrowing limits, or lowered interest rates (Capital One, 2023). As long as you adhere to the agreed-upon payment plan, it is unlikely that credit card forbearance will negatively impact your credit. However, it can indirectly harm your credit by increasing your balance and utilization rate.
Student Loan Forbearance
Student loan forbearance, if arranged according to the original loan agreement, means that late payments are not reported during the forbearance period (Experian, 2021). Your loan will remain in good standing on your credit report.
Importance of a Written Agreement
It is highly recommended to obtain a written forbearance agreement that clearly outlines the terms and conditions (Capital One, 2023). This will ensure that you have a clear understanding of the agreement and its potential impact on your credit.
Conclusion
Forbearance can be a valuable tool for managing financial hardship, but it is essential to be aware of its potential impact on your credit. By understanding the different types of forbearance programs, their reporting policies, and the importance of adhering to the agreed-upon payment plan, you can make informed decisions that minimize the negative consequences on your credit.
References
- Capital One. (2023). How Does Loan Forbearance Affect Credit? Retrieved from https://www.capitalone.com/learn-grow/money-management/does-loan-forbearance-affect-credit/
- Experian. (2021). How Does Forbearance Affect Credit? Retrieved from https://www.experian.com/blogs/ask-experian/how-forbearance-affects-credit/
- Equifax. (n.d.). Forbearance & Deferment Affect Credit Scores | Equifax. Retrieved from https://www.equifax.com/personal/education/personal-finance/articles/-/learn/forbearance-debt-payments-credit-scores/
FAQs
Does forbearance hurt my credit?
Forbearance can have an impact on your credit history and credit scores, depending on the type of account and forbearance program. Lenders may report forbearance to the credit bureaus, which can affect your credit.
How does forbearance affect my credit score?
The impact of forbearance on credit scores can vary depending on the specific circumstances and the lender’s reporting policies. However, missed or underpaid payments during forbearance can be considered delinquencies, which may be reported to credit bureaus and negatively impact your credit score.
What should I do to minimize the impact of forbearance on my credit?
To minimize the impact of forbearance on your credit, it is important to:
* Get a written forbearance agreement that clearly outlines the terms and conditions.
* Make all payments as agreed upon during the forbearance period.
* Contact your lender if you are unable to make a payment.
* Monitor your credit report regularly to ensure that there are no errors.
Can I get forbearance on my mortgage?
Yes, mortgage forbearance is available to help prevent foreclosure. However, missed or underpaid payments during forbearance may be reported as delinquencies to credit bureaus, so it is important to inquire about your lender’s reporting policies before entering into a forbearance agreement.
Can I get forbearance on my credit card?
Yes, credit card forbearance options may include reduced minimum payments, skipped payments, increased borrowing limits, or lowered interest rates. As long as you adhere to the agreed-upon payment plan, it is unlikely that credit card forbearance will negatively impact your credit.
Can I get forbearance on my student loans?
Yes, student loan forbearance is available if you are experiencing financial hardship. If arranged according to the original loan agreement, late payments are not reported during the forbearance period, and your loan will remain in good standing on your credit report.
How long can I be in forbearance?
The length of time you can be in forbearance varies depending on the type of loan and the lender’s policies. For example, mortgage forbearance is typically available for up to 12 months, while student loan forbearance may be available for longer periods.
What happens after forbearance ends?
After forbearance ends, you will need to resume making regular payments on your loan. You may have to repay the amount that was missed during the forbearance period, plus interest and possible fees.