Does Deferment Affect Your Credit Score?
Clarify how deferment affects your credit score. Understand its reporting on your credit report and manage your financial well-being.
Deferment offers a temporary pause in loan payments, providing financial relief. Many wonder how this pause affects their credit standing. Understanding deferment’s impact on credit reporting is important for managing personal finances.
What Deferment Means for Your Credit Report
Deferment is a formal agreement with a lender to temporarily suspend or reduce loan payments. When properly granted, this status is reported to the major credit bureaus as “deferred,” “current,” or “payment postponed.” This distinguishes it from a missed payment or delinquency, which are negative marks. The account remains in good standing throughout the deferment period, as payments are not due.
Lenders typically report the account as current, even without payments, indicating the borrower is adhering to agreed-upon terms. This reporting helps ensure payment history, a significant component of credit scores, is not negatively affected by the temporary halt. For instance, federal student loans in deferment remain in good standing on credit reports.
While the general aim is neutral reporting, terminology can vary across loan types and lenders. Mortgage forbearance, for example, is noted on a credit report but is not negative if terms are met. Deferment differs from default, which occurs when payments are missed without agreement and severely damages credit.
How Deferment Influences Your Credit Score
When properly reported, deferring payments generally has a neutral impact on your credit score. Lenders do not view an approved deferment as negative, as the borrower follows an agreed-upon arrangement. If your loan is correctly marked as deferred and in good standing, it will not directly lower your credit score.
However, deferment can have indirect influences on your credit standing. Interest often continues to accrue on the loan balance during a deferment period, particularly for unsubsidized federal student loans, personal loans, and auto loans. This accumulation of interest can increase the total amount owed, potentially leading to a larger loan balance when repayment resumes. While a higher balance itself does not directly reduce a credit score, it can affect overall debt levels, which lenders consider when evaluating new credit applications.
A main factor influencing your credit score is whether payments were missed before deferment or not resumed promptly afterward. Missing payments before or after deferment results in negative marks like delinquencies or defaults, significantly lowering your score. Deferment’s purpose is to prevent such negative outcomes by providing a temporary reprieve. The length of your credit history, including account age, is a credit scoring component. An account in deferment continues to age, which positively impacts your credit history.
Managing Your Credit During and After Deferment
Proactive steps can help protect your credit standing while in deferment and prepare for its conclusion. It is advisable to confirm with your lender or loan servicer that the deferment has been properly applied and to understand all the terms of the agreement. This includes knowing the exact end date of the deferment period and whether interest will accrue during this time.
Regularly monitoring your credit reports from the major bureaus helps ensure deferment is reported accurately. You can obtain free copies annually from annualcreditreport.com. If you find inaccuracies, such as deferment reported as a missed or late payment, dispute the information with both the credit bureau and the lender.
Planning for repayment before deferment ends is important to avoid negative credit score impact. Contact your loan servicer well in advance to discuss repayment options and ensure a smooth transition back to making payments. Continuing to make timely payments on all other credit accounts, such as credit cards or other loans, helps maintain a strong overall credit profile.