If you’re currently or anticipate having trouble making credit card, personal or auto loan payments, deferment may be a good option.
Deferment puts off loan payments by one, two, or maybe even three months. However, your loans may continue to accrue interest, and you might end up paying more in the long run or have a larger monthly payment once you resume making payments.
How debt payment deferment affects credit scores
Payment deferment itself does not directly impact your credit scores. This is because most credit card companies do not report deferred payments as missed or late payments to the credit bureaus.
However, there are some indirect ways that payment deferment can affect your credit:
- Interest Accrual: While you are deferring payments, interest may continue to accrue on your outstanding balance. This can increase your overall debt and your credit utilization ratio (the amount of credit you’re using compared to your total available credit), which can negatively impact your credit score.
- Missed Payments Before Deferment: If you miss a payment before your deferment is approved, that late payment will be reported to the credit bureaus and can lower your score.
- Other Factors: If your financial difficulties leading to the deferment also cause you to miss payments on other bills or max out other credit cards, those actions will negatively impact your credit score.
How credit card payment deferment works
Credit card payment deferment is an agreement between you and your credit card issuer to temporarily pause or reduce your monthly payments.
It’s designed to provide relief if you’re facing financial hardship, such as job loss, medical emergency, or other unexpected expenses. Payment deferment isn’t a long-term solution.
How it works:
1. Contact Your Card Issuer: If you’re struggling to make payments, contact your credit card issuer as soon as possible. Explain your situation and inquire about their hardship or assistance programs.
2. Eligibility and Documentation: The issuer will likely ask for documentation to verify your financial hardship, such as proof of unemployment, medical bills, or other relevant documents.
Agreement Terms: If you’re approved, the issuer will explain the terms of the deferment. This includes the duration of the deferment (typically one to three months), whether interest will continue to accrue, and any fees associated with the deferment.
Resuming Payments: Once the deferment period ends, you’ll be required to resume making regular payments. The issuer may offer options like a revised payment plan to help you catch up.
Your creditor should not report late payments to the credit bureaus once you have entered into a deferment agreement and your credit scores will not be adversely impacted.
Car or personal loan payment deferment programs
This type of deferment might take the form of skip-a-payment program. Instead of making a regular payment, the creditor might let a borrower skip it and have it added on to the end of their loan term. Lenders may allow borrowers to reduce their personal monthly loan payments temporarily.
Why you should request payment deferment
Getting a break from loan payments temporarily can offer some financial breathing room, but it’s important to understand how deferred payments may affect your credit score.
Because payment history is a crucial factor in calculating FICO scores, avoiding late payments is critical to your credit score. Don’t hesitate to request a payment deferment arrangement with your creditors to protect your credit history.
Lenders may report a deferment notation to the credit bureaus, but this should not directly impact your scores.
However, if you missed payments prior to a deferment agreement, those late payments won’t be removed from your credit history unless your creditor grants you goodwill removal of late payment notations.
Requesting a goodwill adjustment may take several requests to multiple people at your credit card company, but it may be worth the effort in the long-run since payment history accounts for 35% of a FICO® score.
Stay on top of your credit by taking advantage of weekly free credit reports from Experian, Transunion, and Equifax. Visit annualcreditreport.com.
Act quickly when experiencing trouble making payments
If you’re currently faced with late payments or foresee being unable to afford credit card or loan payments, reach out to your creditor or lender quickly. They can explain options whether it be deferment or some other type of payment arrangement that can keep your account in good standing.
