Watching your credit score when deferring debt repayment
Did you defer your debt repayment during the COVID-19 pandemic? You may be wondering how it will affect your credit score. The intent is not to impact your credit score, but that’s not always what happens. More than half a million Canadians have deferred just their mortgage payments alone, so it’s something on a lot of peoples’ minds.
In this article we’ll look at the ways banks, lenders and governments are allowing borrowers to defer debt repayments during COVID-19. We’ll also look at ways to protect your credit score when deferring debt repayments.
Banks, Lenders and Governments Allow Debt Repayment Deferrals During COVID-19
Amid the unprecedented COVID-19 pandemic, to address the financial implications of COVID, banks and other financial institutions allowed borrowers to defer debt repayment for several months. The move aims to help those suffering financial hardship due to COVID.
That’s not all. If you have to repay your student loan, you can expect some relief there as well. Provinces such as Ontario and Quebec are allowing for the suspension of student debt repayment.
Banks
Banks were allowing deferred payments for mortgage payments, credit cards, auto loans and other monthly payments. These deferral plans allowed borrowers to make interest-only payment or stop making principal and interest payments altogether for a period of time, depending on the borrower’s financial situation. (The borrower shouldn’t expect to be penalized or face higher interest rates because of it.)
Oftentimes these payment deferral options come with the reassurance from the lender that it won’t be reported on your credit report as a late or missed payment that would hurt your credit score.
Lenders
If a lender reports a payment as being take, normally it would be an error. That’s something you could dispute just like any other error you find on your credit report.
However, these aren’t “normal” times. The credit reporting bureaus Equifax and TransUnion and the lenders are still trying to figure everything out.
There were rumblings when the COVID-19 pandemic first emerged that banks and other lenders didn’t have the ability to not report deferred payments. If you’re late on your payment, even if it’s due to a payment deferral arrangement, that’s what may be sent to the credit reporting bureaus.
The banks and the government are trying to figure out a way that the Canadians suffering financial difficulties where you won’t be unfairly penalized for mortgage deferrals and other debt repayment deferrals.
The credit reporting bureaus have provided guidance to lenders on how to properly report payment deferrals. According to TransUnion, participating in a debt deferral payment plan should have a neutral impact on your credit score.
Protecting Your Credit Score
Although your bank may have the best intentions, sometimes mistakes are made. That’s why it’s so crucial that you confirm with your bank that deferring debt repayments won’t impact your credit score. The last thing you’d want to find is a missed or late payment on your credit report when you go to apply for a mortgage or loan later on and be denied because of it.
You can protect yourself by asking for proof in writing that deferring your debt payments won’t affect your credit score. Even if your bank says verbally that deferring your payments won’t affect your credit score, if you get into a credit dispute, you’ll likely need to provide something in writing to the credit reporting bureaus to prove your case in order to clear it up.
It’s equally important to keep a watchful eye on your credit report to make sure there aren’t any inaccuracies. You can do that by requesting a copy of your credit report from Equifax and TransUnion.
Get your Credit Report when deferring debt repayment
You’re entitled to a free copy of your credit report by regular mail. It’s a good idea to regularly check your credit report. Make sure you check your credit reports with both Equifax and TransUnion at least once a year and three months before you plan to apply for a major loan, such as a mortgage or car loan.
It’s important that you ensure your credit score is accurate because lenders use it to determine whether to grant you a loan and if so at what interest rate. Some lenders have their own internal credit scoring, but the Equifax and TransUnion credit reports still play an important role nevertheless.
If you see an error on your credit report, it’s a good idea to dispute it sooner rather that later. That’s because of the unprecedented number of Canadians deferring debt repayments, it may take longer than usual to clear up any errors on your credit report.
The good news is that it’s in the lenders interest to report your credit information accurately. That’s because lenders want to lend money. However, when you have a low credit score, it limits their ability to lend to you.
Conclusion
Did you defer your debt repayments and you’re running into difficulty managing your debts once the payment deferral has ended?
Use one of our relevant calculators to help get your debt situation back under control. Better yet, call us today for a free debt consultation.
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