Payment holidays are financial agreements between a lender and a borrower, allowing the borrower to miss scheduled payments on a loan for a specified period of time.
They are most commonly agreed between a mortgage lender and mortgage holder, and with the outbreak of the coronavirus crisis, they have become increasingly popular. They can also be agreed for other loan types too.
A payment holiday can be a great way to take a financial break if you believe that you might miss your next loan repayment. However, in this article, we take a closer look at payment holidays and how they might affect your credit score.
Payment holidays are typically built into most mortgage agreements. They simply allow you to take a break from payments as long as it is agreed in advance with the lender, usually your bank.
Taking a break without an agreement will put you in arrears on your mortgage and this will affect your credit score.
However, an agreement in advance won’t affect your credit score. Payment holidays aren’t exactly advertised by the banks, but in the recent coronavirus crisis, they have become a good way to take a break, and have become widely used by people in financial difficulty.
Payment holidays can also be taken out on loan repayments, although not all loans have them built-in as a provision.
These can be harder to secure than a mortgage payment holiday, for this reason, and you might need more pressing reasons to stop payments, which will need to be explained to the lender.
If it’s a payday loan or a short term loan, you’re unlikely to get any respite, but if it’s a traditional loan from a bank, then they will be more amenable.
Credit cards and overdrafts
Payment holidays can also be requested for credit card repayments and overdrafts, but again, you need to prove extenuating circumstances. These are being granted frequently during the coronavirus crisis though.
With credit card repayments and overdrafts, the interest that is accrued can be quite high, and this continues to rack up during the payment holiday, so be careful putting these types of payments on hold for a lengthy period of time, as they are only meant to be short term measures.
Will it affect my credit score?
The important thing to note is that you can’t just stop paying for a few months. A payment holiday has to be agreed in advance. When it is, then after the payment schedule is unfrozen, your credit score will be the same as before.
Your credit score will not improve nor will it get worse. If you were on track before the payment holiday with all your repayments, then this will be reflected again. If you were already in arrears before taking the payment holiday, then this will appear on your credit score.
Always check the provisions beforehand, and don’t stop payments until you are certain the agreement is in place, or your score will be negatively affected.
Will I be charged interest?
Most lenders and banks will continue to charge interest when you’re on your payment holiday. This does mean that you will accrue more debt over the holiday period, although as a payment holiday is only a short term measure, this isn’t too much to worry about in the long term.
A payment holiday can be a great way to take a break from your loan repayments if it’s looking likely that you’re not going to make the next deadline. In today’s economic downturn due to coronavirus, payment holidays have even become encouraged, so there’s no reason not to take advantage of them if it can help you financially.