Borrowers Confused about Payment Holidays and Impact on Credit Score
Consumer complaints service, Resolver, has reported that many borrowers have been left baffled about the terms of covid-19 payment holidays and the impact that payment deferrals could have on their finances and credit score.
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Covid payment holiday confusion - Lenders charge interest
Over one-third of struggling consumers who took a payment holiday on their mortgage, personal loan, credit card or car finance were completely unaware that lenders could continue to charge interest on the amount outstanding or when they had to pay it.
1 in 7 respondents have already taken a payment holiday on their mortgage (or other types of financial agreements) and 4 in 10 said that lenders had not clearly communicated their options to them, despite the Financial Conduct Authority clearly stating on their website:
“Before agreeing on any support, your lender should give you enough information so you can make an informed decision.”
The Financial Conduct Authority’s new rules
The FCA’s new rules mean that mortgage lenders can permit borrowers (those who have been financially affected by the Coronavirus pandemic) to delay paying their mortgage for up to 6 months.
In addition, consumers can also request a 6-month payment freeze on:
- Personal loans
- Credit and store cards or catalogue credit agreements
- Rent to own, buy now/pay later and pawnbroker agreements
Lenders can only agree to payment deferrals for up to 3 months at a time. At the end of the first 3 months’ deferral period, you can reapply for a further 3 months’ payment holiday.
The payment deferral period for short-term, high-cost loans (like payday loans) is only 1 month.
Important note: There is now a payment holiday extension until 31 March 2021. This means that you can apply for a payment holiday up to that date and if you’ve already taken one, you can ask to have this extended past that date up to a total of 6 months. All payment holidays will end by 31 July 2021. If you’ve only recently been affected by covid-19 and want the full 6 months allowance, you should try to apply before your February 2021 loan repayment is due.
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Credit score concerns
Many consumers are worried that taking payment holidays on their mortgage or a payment freeze on any other type of debt will be deemed as ‘missed payments’ on their credit file and will negatively impact their credit rating.
However, the FCA has stated that “firms shouldn’t report payment holidays, agreed under our guidance, as missed payments on your credit file.”
Note the word ‘shouldn’t’. Obviously, there is no concrete guarantee that a mistake cannot be made and your payment holiday could accidentally be noted on your credit file.
To be absolutely certain this hasn’t happened, we strongly recommend you check your credit report with all of the main credit reference agencies to see if any payment holidays have been noted on any of your reports, contact your lender immediately asking them to remedy this in accordance with the FCA’s guidance.
To see all the information held on you by the four main credit reference agencies in the UK, visit Checkmyfile, a multi-agency credit checking website. Here, you'll be able to identify any errors listed on your reports with Experian, Equifax, TransUnion and Crediva. Visit Checkmyfile now by tapping the button below.
The FCA wants to help protect borrowers who choose to defer loan repayments during these unprecedented times, against having their ability to obtain credit in the future thwarted as a result.
However, this help will come to an end and if you’re still struggling to pay your mortgage or other debts after a 6-month payment holiday has elapsed (and your lender agrees to you continuing to temporarily defer payments for a period in excess of 6 months), these additional deferred payments can be noted on your credit file in the usual way.
If a lender does offer more support and agrees to extend your payment deferral for longer than 6 months, your lender should let you know how this could affect you and your credit rating.
Remember that it isn’t just your payment history that lenders look at when assessing your creditworthiness for a loan. They will also take into account how much debt you have, your income and outgoings, how long you’ve lived somewhere and your bank account history, etc.
For more detailed information on what can affect your credit score and how to improve it, take a look at our helpful guides below.
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