Does a Loan Forbearance Affect Credit?
Unpack the complexities of how loan forbearance affects your credit score and discover ways to manage its impact effectively.
Loan forbearance offers a temporary pause or reduction in your loan payments, providing financial relief during periods of hardship. This arrangement allows borrowers to suspend or lower their monthly obligations for a set period. While forbearance can be a valuable tool for managing financial difficulties, its impact on your credit profile is not always straightforward. The nature of this impact varies significantly based on how the forbearance is reported to credit bureaus and the specific terms of your agreement.
How Forbearance is Reported to Credit Bureaus
Lenders report loan forbearance status to major credit bureaus: Experian, Equifax, and TransUnion. When an account enters forbearance, lenders typically report specific codes or remarks, such as “account in forbearance” or “payment deferred.” The crucial detail is whether the account is simultaneously reported as “current” or if any past-due status is maintained.
If your account was current before entering forbearance, and the lender reports it as “current” with a forbearance indicator, this generally prevents new negative marks for missed payments during the forbearance period. Conversely, if an account was already delinquent before forbearance began, those prior delinquencies remain on your credit report. The actual status reported, whether “current” or “late,” is the primary factor influencing your credit history, rather than merely the presence of a forbearance notation.
The Direct Impact on Your Credit Score
The way forbearance is reported directly influences various components of your credit score, with payment history being the most impactful factor. If your loan servicer reports your account as “current” throughout the forbearance period, your payment history generally remains unaffected by the pause in payments. This means new late payment marks are typically avoided, which is favorable for your score. However, any delinquencies that occurred before the forbearance period began will still be reflected on your credit report and continue to influence your score negatively.
Credit utilization, which measures the amount of credit you are using relative to your available credit, is another factor that can be indirectly affected. While forbearance itself doesn’t directly change your credit utilization, if interest continues to accrue and is then capitalized—meaning it’s added to your principal balance—your total loan amount will increase. This higher balance could lead to a higher credit utilization ratio for that specific loan, potentially impacting your score, especially if it pushes your overall utilization higher. Other credit score factors, such as the length of your credit history, the types of credit you use, and new credit inquiries, are not directly impacted by forbearance. However, some lenders, when reviewing new credit applications, might view the “account in forbearance” notation less favorably, even if your credit score remains high.
Navigating Forbearance and Protecting Your Credit
Proactive communication with your loan servicer is important when considering or entering loan forbearance. Discuss the terms of the agreement, including how interest will accrue, whether it will be capitalized, and reporting practices to credit bureaus. Understanding your repayment options once forbearance ends, such as a lump sum payment, a repayment plan, or a loan modification, can help you prepare financially and avoid future credit issues.
Regularly monitoring your credit reports from all three major bureaus—Experian, Equifax, and TransUnion—is an important step during and after forbearance. You are entitled to free annual credit reports, and checking them allows you to verify that your forbearance status is being reported accurately by your lender. If discrepancies are found, dispute them with the credit bureaus to ensure your credit history reflects the correct information. Making partial payments during your forbearance, if financially possible, can also reduce the total amount owed at the end of the period, making the transition back to full payments more manageable and further protecting your credit standing.