In March 2020 Experian, Equifax and TransUnion, the three big UK credit reference agencies, agreed that having a temporary “payment holiday” with a lender because of Coronavirus problems won’t harm your credit score.
The FCA, who regulates lenders in the UK, then set out detailed rules about payment breaks for most kinds of debt, including mortgages, unsecured loans, credit cards, catalogues, car finance, payday loans etc.
For most of these you can get a three month payment break (the FCA calls this a “payment deferral”) and at the end if you need more help you can have a second three month break. (The exception is payday loans where you can only have a one month freeze, but no interest being added.)
The FCA said these payment breaks will not be recorded as missed payments or defaults.
This is good news. Worries about credit scores should not put people off from getting the help they need.
Protecting your credit score if you take payment breaks
The payment status of your account with that lender will not get worse while your payments are halted or reduced:
- if your account was up-to-date before, it will continue to show as up-to-date until the payment break ends – no missed payments will show;
- if you already had arrears on the account, the level of arrears will remain the same;
- a payment break or reduction with your lender will not be reported on your credit report.
This means the payment reduction or pause to payments that you have set up will not make your credit score change.
But other things also affect your credit score and using more credit because the interest is piling up may harm your credit rating. If you take out a new loan or use more of your credit card limit or more of your overdraft, you may see your credit score drop because of this. See How much will my credit score change? for some details about how large these effects are.
Future lenders may be able to see payments breaks
The FCA who regulates the lenders says:
“Under our guidance, firms should not report a worsening status to credit files if you take a payment freeze. This should help make sure that there is no long-term negative impact on your credit file if you are able to get back on track at the end of a payment freeze… You should also remember that credit files aren’t the only source of information that lenders can use in lending decisions. Factors other than payment history may also be relevant.”
So in future when you apply for credit, the FCA is warning that if you have had problems during the pandemic and taken a payment break, lenders may see this and it may mean you are declined for that credit.
There are various ways lenders may be able to see what has happened to you:
- your actual payments made will show in your credit records. They won’t show as missed payments or defaults, but a lender who looks closely at your payment history will be able to that you didn’t make any payments in April, May and June, say.
- many lenders try to crosscheck what you say you earn on a credit application by looking at CATO (that stands for Current Account TurnOver) information from banks. This tries to show how much has been credited to your bank accounts. That may have been reduced if you were on furlough or if your self employed income dried up
- some lenders, including most mortgage lenders, ask for 3 or 6 months of bank statement, which will show if your income dropped or if your mortgage, loan and credit card repayments were halted.
- a few lenders may ask you for access to your bank account via “Open Banking“. This isn’t much used yet but it may become more common in the rest of 2020 and 2021 as lenders search for ways to reduce their risk in what is expected to be a very difficult environment.
Will this really affect you?
Lenders will be able to to see if you have had reduced income through CATO, bank statements and Open Banking even if you never asked for a payment break.
That reduced income is likely to be what most worries lenders and may reduce your chance of getting credit for a while.
So if you have had financial problems over the pandemic, it’s going to be hard to tell if taking a payment break is making your future chance of credit much worse.
It seems likely that there will be three sorts of lenders who will be most concerned:
- lenders giving large, long term loans such as mortgages and car finance;
- credit card lenders offering 0% deals; and
- lenders who specialise in the “bad credit” market, who may need to be more sure that you won’t have any problems in future.
There are already reports of some people being turned down for mortgages, see this news story: Revealed: Borrowers who took loan repayment ‘holidays’ after being told it wouldn’t affect their credit score are now struggling to obtain mortgages.
These effects may turn out to be short term if the world gets back to normal over the next few months. If it does, will any lender in 2022 really care that you, along with millions of other people, had a payment break in 2020?
Should this put you off taking a second payment break?
In July and August many people will have to decide whether to take another payment break on their mortgage, credit card, car finance or other debts.
I think the simple answer is that if you need another payment break then take it and don’t worry about accessing future credit – the important thing is to get through now without defaults which will harm your credit record for 6 years.
But if you don’t need a payment break then don’t take it! Especially if you need to apply for a mortgage or another large loan in the next six months.
This post was updated in July 2020.