Does Deferring Loans Affect Your Credit Score?

Loan deferment offers a temporary solution for individuals facing financial challenges, allowing them to pause or reduce loan payments for a set period. This relief can last from one month to several years, depending on the loan type and lender’s policies. It provides time to manage finances during unexpected circumstances. This article clarifies how loan deferment appears on a credit report and influences a credit score.

Understanding Loan Deferment

Loan deferment is an authorized agreement with a lender to postpone loan payments. This arrangement differs from simply missing payments, which leads to negative credit reporting and financial penalties. Lenders typically require evidence of financial hardship to grant deferment. Eligibility criteria vary based on the loan type, such as federal student loans, personal loans, or mortgages.

Common scenarios for deferment include:
Unemployment
Active military service
Enrollment in an eligible educational program at least half-time
Economic hardship
Medical emergencies or rehabilitation training programs

During deferment, borrowers are not required to make monthly payments. However, interest may continue to accrue on the loan, depending on its type and the lender’s policies. This accrued interest can increase the overall cost and extend the repayment term.

How Deferment Appears on Credit Reports

When a loan is deferred, lenders report this status to credit bureaus like Experian, TransUnion, and Equifax. The credit report will indicate the account as “deferred,” “payment suspended,” or “current on payments” during the approved deferment period. This distinguishes an authorized pause in payments from a missed or late payment.

An account in authorized deferment is considered in good standing. Unlike delinquent payments, which significantly lower a credit score, a properly managed deferment does not result in a negative mark on the credit report. The deferment must be formally approved by the lender; stopping payments without approval leads to negative reporting.

The account’s payment history prior to and after deferment remains relevant. Timely payments before deferment contribute positively to the credit profile. Conversely, any prior late payments or delinquencies will still appear on the report and can affect the credit score. While the deferment status itself is neutral, the overall context of the account’s history is considered by credit scoring models.

Impact on Your Credit Score

An authorized loan deferment does not directly harm a credit score. Credit scoring models do not penalize borrowers for periods where payments are not due, provided the deferment was properly approved and reported. The loan remains in good standing, preventing negative consequences associated with missed or late payments.

However, indirect effects on one’s financial profile can occur. Interest continues to accrue on the loan during deferment, potentially increasing the total amount owed and extending the repayment term. This extension could influence credit factors like the average age of accounts. Increased total debt due to accrued interest might also affect future debt-to-income ratios, which lenders consider for new credit applications. While deferment protects the credit score from immediate negative marks, borrowers should be aware of these longer-term financial implications.

Deferment Versus Forbearance

Loan deferment and forbearance are options for temporarily pausing loan payments, but they differ in terms and implications. A primary distinction is interest accrual: during deferment, interest may not accrue on certain federal student loans, such as subsidized loans. In contrast, interest typically accrues on all loan types during forbearance, increasing the total loan cost.

Eligibility criteria also vary. Deferment often requires specific circumstances like in-school enrollment or military service, while forbearance may be granted for broader financial hardships. From a credit reporting perspective, both authorized deferment and forbearance result in the account being reported as current or in good standing, avoiding negative credit impacts. However, lenders may note forbearance on a credit report, which, while not a direct negative mark, could be considered by some future lenders. Both options prevent delinquency and protect credit health during difficult times.

Post-Deferment Credit Considerations

Once the deferment period concludes, loan payments are expected to resume according to a new schedule. Borrowers should understand the updated monthly payment amount, which may be higher due to any interest that accrued and was capitalized during the deferment. The loan’s overall repayment term will also likely be extended by the deferment’s duration.

Resuming timely payments post-deferment is crucial for maintaining a positive credit history. Failing to make payments after the deferment ends can lead to delinquencies, which will be reported to credit bureaus and significantly damage a credit score. Proactive communication with the loan servicer before the deferment ends can help clarify repayment terms and ensure a smooth transition back to active repayment.