does forbearance hurt your credit

Does Forbearance Hurt Your Credit?

For many of us, there comes a time when we face financial hardship and struggle to keep up with loan payments. Whether due to job loss, medical expenses, or other unforeseen circumstances, missing or delaying payments can negatively impact your credit. During difficult times, forbearance may seem like an attractive option to take a temporary break from payments. But before entering into a forbearance agreement, it’s important to understand how it can affect your credit.

What is Forbearance?

Forbearance lets borrowers temporarily stop or lower loan payments for a set amount of time. It doesn’t get rid of what you owe, but it does let you put off payments until you can start paying again. Forbearance is usually granted for up to 12 months, but in some cases it may be possible to get an extension.

Federal student loans, mortgages, credit cards, and other types of debt can be put on hold. Eligibility and terms vary by lender. Forbearance is an option for federal student loans if you can show that you are having a hard time paying them back. Most private mortgages and student loans also have programs that let you choose to not make payments.

Forbearance vs. Deferment

Forbearance and deferment are both ways to temporarily put off payments, but there are some important differences:

• Interest usually doesn’t build up on federal student loans and some mortgages during deferment. Interest does build up during forbearance.

• Forbearance is granted at the discretion of the lender while deferment may be an automatic process based on eligibility requirements.

• Forbearance may be available for a wider variety of loan types compared to deferment.

• Deferment periods may last longer, often 3 years for federal student loans. The maximum length of forbearance is generally 12 months.

How Forbearance Can Impact Your Credit

Forbearance gives you relief from making payments in the short term. But depending on the type of loan and how your lender reports the modified payment status, it can negatively impact your credit in the long run.

• Your payment history can be affected – If your loan servicer reports your payments as delinquent or late while you are in forbearance, it can significantly drag down your credit scores. Missed payments remain on your credit reports for 7 years.

• Increased interest – Since interest continues to accumulate during forbearance, your loan balances will be higher when regular payments resume. Higher credit utilization rates tend to lower credit scores.

• Credit inquiries – Requesting forbearance often involves a credit check, resulting in a hard inquiry on your credit report. Too many inquiries in a short period tends to negatively impact your credit.

• Eligibility for other credit – Lenders may view forbearance negatively in evaluating applications for mortgages, auto loans and other types of credit. It can make you appear as a higher credit risk.

• Length of credit history – Since forbearance allows you to skip payments, those months don’t count towards your length of on-time payments. This factor can shorten your established credit history.

How Different Loans Are Impacted

• Federal student loans – Forbearance is structured into federal loan programs, so your credit is typically not affected as long as you adhere to repayment terms.

• Private student loans – Impacts vary. Some lenders continue to report loans as current during forbearance while others report them as delinquent or defer payments. Check with your lender.

• Mortgages – Mortgage forbearances are generally reported as current as long as agreed terms are followed. But increased balances due to interest may affect your credit utilization.

• Credit cards – Issuers typically continue to report credit cards as current during hardship programs. Higher balances can increase credit utilization.

• Auto loans – Loan deferrals allow you to skip payments, which are added to the end of the loan term. This keeps payment history positive but results in higher balances.

• Personal loans – Lenders may report loans as current during deferment if terms are met. But increased interest can raise credit utilization if balances grow.

Strategies to Minimize Credit Damage

If you need payment relief, consider these tips to help reduce impacts to your credit:

• Ask lenders how they report modified payment programs – Confirm that your payment status will still be reported as current during forbearance.

• Pay what you can – Making partial or reduced payments shows good faith effort and keeps accounts current.

• Avoid unnecessary spending – Minimize balance increases by limiting discretionary purchases that add to your debt.

• Pay down balances before forbearance ends – Work to pay down balances as much as possible before regular payments restart. Lower balances help minimize credit utilization impacts.

• Rebuild credit history – After forbearance, focus on timely payments to start rebuilding your credit payment history.

• Limit credit inquiries – Only apply for credit if absolutely necessary while in forbearance to avoid unnecessary inquiries.

The Bottom Line

Entering into forbearance is not necessarily damaging to your credit, particularly if you continue meeting payment obligations to the extent possible. However, missed payments, higher balances, and other potential side effects can negatively impact your credit if you are not careful. By understanding the risks and taking steps to minimize credit impacts, you can strategically use forbearance to make it through hard times without compromising your credit health in the long run.