How will my credit file and ability to borrow be affected if I’ve had a payment holiday?

Worried a payment break will make it harder to get credit going forward? Here we give you the lowdown

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Many borrowers struggling to keep up with payments on mortgages, loans and credit cards due to the Covid-19 pandemic have sought help over the past few months.

This includes those who have been made redundant, put on furlough, or who have suffered a reduction in income.

Banks and financial institutions have been offering payment holidays – breaks from payments for up to three months. In some cases, these breaks have been extended up to six months.

But while these breaks have offered some much-needed breathing space to beleaguered borrowers, there are some things you need to know.

How many people have taken payment holidays?

According to the latest figures from banking trade body, UK Finance, from December 2020, 127,000 mortgage payment deferrals were in place in mid-November, a significant reduction in customers seeking this form of support from June’s peak of 1.8 million.

Figures also show that in December, 55,000 credit card and 22,000 personal loan payment deferrals were in place for customers facing financial difficulty, down from 84,000 payment deferrals on credit cards and 50,000 on personal loans at the end of October. 

Is a payment holiday right for me?

While a payment holiday may sound very appealing if your income has taken a serious knock, you need to understand what this means.

You will get a break from payments, but this is only temporary. You still need to repay what you owe.

And crucially, interest will still roll up over those periods. As costs will keep building, taking a payment holiday could cost you more in the long term.

What does this mean?

Say, for example, you have a credit card with a balance of £2,000 and an annual percentage rate (APR) of 20%, costs could soon mount up. Over a six-month period, you could accrue £200 in interest.
Given that interest will continue to be charged, a better option may be to reduce payments – as opposed to stopping altogether.

Clearly, though, this option will not work for all borrowers.

Will a payment holiday be recorded on my credit report?

While taking a payment break would usually be noted on your credit file, during the current crisis, the rules have been changed.

According to UK Finance, payment holidays on credit cards, personal loans or mortgages will not be reported to credit reference agencies as a customer being ‘in arrears.’

The Government and Financial Conduct Authority (FCA) have maintained throughout the pandemic that payment holidays should not result in your credit file being negatively affected.

Will it affect my ability to borrow in the future?

This is where things get a bit more complicated.

Despite the pledges mentioned above, lenders could, in practice, still take a payment break into account when making future lending decisions.

They may look at the ‘gap’ in your repayments as a sign your finances are not watertight, and this could have an impact on your ability to get credit in future.

In the case of homeowners, this could mean it becomes harder to remortgage – or to get a new deal on competitive rates. For other borrowers, it could mean you are faced with extra costs when you take out a loan or apply for a credit card.

Can I do anything to improve my chances of getting accepted for credit?

If you have taken a payment holiday due to the pandemic, it may be worth waiting a few months after resuming payments before making a new application for credit.

Equally, if you are in a position to be able to resume making repayments before the end of your payment holiday, you should do so. It will stop extra interest being charged.

Is it still possible to get a payment holiday?

As a borrower, a payment holiday should be viewed as a ‘last resort.’

That said, if you have exhausted your other options, and haven’t yet made use of the scheme – or its extension – you can still request a payment deferral right up until the end of March.

When will payment holidays end?

The FCA has said all payment breaks must end by July 31.

Speak to your lender

If you feel you need longer than six months to get back on your feet, you should talk to your lender.

Rules from the FCA say that after you’ve had a payment holiday for six months, you cannot continue on that path. Your lender then needs to find what is known as a ‘tailored approach’ to help with the outstanding loan. This will be offered on a case-by-case basis.

With a mortgage, for example, you may be able to get the mortgage term extended so monthly payments are lower – or you may be able to move to continued reduced payments.

Don’t miss a payment

Crucially, under ‘tailored support,’ you must not miss a payment, or make a repayment late, as this will go on your credit report – and harm your score.

‘Black marks’ will remain on your credit file for six years and could make it harder to get accepted for credit cards, loans, mobile phone contracts and other products in the future.

Word of warning

Also be aware that if you seek out bespoke debt relief – beyond a six-month payment holiday – this could make accessing credit in the future a whole lot harder, or even impossible.

Check your credit report

To be on the safe side through all this ongoing financial uncertainty, you should keep a close eye on your credit file. You can check your report and score – and get personalised tips on how to boost your score – with Credit Monitor.

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