Does Deferment Hurt Your Credit Score?
Understand the relationship between loan deferment and your credit score. Learn what to expect and how to monitor your credit profile.
Deferment offers a temporary pause in loan payments, providing financial relief during challenging times. Many wonder about its effects on their credit score. Understanding how deferment interacts with your credit profile is important for managing your financial health.
What is Deferment and How Credit Works
Deferment is an approved period during which a borrower is not required to make payments on a loan. This arrangement must be formally agreed upon with the lender. During this time, the loan account remains open, but payment obligations are temporarily suspended.
A credit report serves as a record of your borrowing history, encompassing various accounts like credit cards, mortgages, and installment loans. It includes information such as payment history, outstanding balances, and credit limits. Your credit score is a numerical representation derived from this report, summarizing your creditworthiness for potential lenders. Payment history is a significant factor, accounting for approximately 35% of a credit score calculation.
Direct Impact on Your Credit Score
A lender-approved deferment does not directly harm a borrower’s credit score. When a deferment is established, lenders report the account status to credit bureaus—such as Equifax, Experian, and TransUnion—as “deferred” or “current/paid as agreed.” This status indicates the borrower is not delinquent and distinguishes it from missed payments, which negatively impact credit.
The key distinction lies between an authorized deferment and an unapproved cessation of payments. Simply failing to make payments without a formal agreement with the lender will result in missed payment notations on a credit report, leading to a decline in credit scores. Conversely, when a deferment is in place, the loan account remains in good standing, and the temporary pause in payments does not reflect negatively on payment history.
Related Factors on Your Credit Profile
While deferment itself does not directly harm your credit score, it can affect other aspects of your financial profile. Interest often continues to accrue on the loan balance during the deferment period, increasing the total amount owed. If interest accrues and is not paid during deferment, it may be capitalized, meaning it is added to the principal balance when payments resume. This capitalization results in a larger outstanding loan balance, which can lead to higher interest charges over the remaining life of the loan.
An increased loan balance, even if not directly impacting the credit score, can influence aspects like debt-to-income ratio. Deferment extends the overall repayment term of the loan. A longer repayment period, while potentially lowering individual monthly payments, leads to paying more in total interest over the life of the loan. This extended obligation can affect a borrower’s long-term financial planning and capacity for taking on new credit.
Steps to Monitor Your Credit During Deferment
To ensure the deferment is accurately managed, borrowers should take proactive steps to monitor their credit. Obtain written confirmation of the deferment agreement from the lender, detailing the terms and duration of the payment pause. This documentation provides a clear record of the arrangement.
Regularly checking your credit reports is an important action to confirm the deferment status is reflected. Consumers are entitled to a free credit report weekly from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. Reviewing these reports helps identify any discrepancies or incorrect negative marks that might arise.
It is also important to understand when the deferment period concludes and when payments are scheduled to resume. Borrowers should be aware of the new payment amount and due dates to avoid inadvertently missing payments once the deferment ends. If any inaccuracies are discovered on a credit report or if there are questions about the deferment, immediate communication with the lender is advised to resolve the issue.