Does Forbearance Affect Your Credit Score?

When unexpected financial challenges arise, individuals often seek temporary relief from their debt obligations. Events such as job loss, medical emergencies, or other significant life changes can disrupt a steady income, making it difficult to meet regular monthly payments. In these situations, understanding available options to manage debt can provide essential support. Forbearance represents a temporary financial relief measure designed to help borrowers navigate periods of hardship.

What Forbearance Means

Forbearance is an agreement between a borrower and a lender that allows for a temporary pause or reduction in loan payments. This arrangement is offered during financial difficulty to prevent a borrower from falling into delinquency or default. The purpose of forbearance is to offer a short-term solution, allowing individuals to address financial hardship without immediately facing consequences of missed payments.

Lenders may offer forbearance for various types of loans, including mortgages, student loans, and auto loans. Terms vary by lender and loan type, but it is a temporary adjustment, not a permanent solution or loan forgiveness. Interest often continues to accrue on the loan balance during the forbearance period, meaning the total amount owed may increase.

Borrowers need to request forbearance from their lender and demonstrate a qualifying financial hardship. The agreed-upon period for forbearance can range from a few months up to a year or more, depending on the loan type and the borrower’s circumstances. Upon the conclusion of the forbearance period, borrowers are required to resume payments and address any accumulated missed payments, often through a lump sum, a repayment plan, or a loan modification.

How Forbearance Appears on Credit Reports

When a loan enters forbearance, lenders report this status to the major credit bureaus, including Experian, Equifax, and TransUnion. The way this information appears on a credit report can vary but involves specific notations or codes. Lenders often use remarks such as “account in forbearance” or “payment deferred” in the ‘Remarks’ or ‘Terms’ field associated with the account. Additionally, special comment codes, like “CP” for forbearance or “AW” for natural disaster, may be used.

A distinction in reporting relates to the account’s status when forbearance begins. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, for instance, specific provisions required furnishers of credit information to report an account as “current” if it was current before entering forbearance due to COVID-19 related hardship, provided the borrower fulfilled the forbearance terms. If an account was already delinquent before the forbearance period, the delinquent status remained unchanged unless the borrower brought the account current during the forbearance.

For federal student loans, forbearance is reported in “good standing” or as “current” on credit reports, reflecting that the borrower has an authorized agreement with the lender. However, for other loan types or outside of specific legislative protections like the CARES Act, reporting practices can differ. Consumers should understand how their specific lender intends to report the forbearance, as the presence of a forbearance notation itself is not considered a negative mark, but the accompanying account status is what matters for credit history.

Forbearance and Your Credit Score

The way forbearance is reported to credit bureaus directly influences its impact on a credit score, particularly the payment history component. If a loan servicer reports the account as “current” or “paid as agreed” throughout the forbearance period, as was often the case under CARES Act provisions, it should not negatively affect this factor in credit scoring. This means that during an approved forbearance, new late payment marks are avoided, which helps preserve the credit score.

However, indirect impacts on a credit score can occur. If interest continues to accrue during forbearance and is then capitalized, meaning it is added to the principal loan balance, the total amount owed will increase. This higher balance could lead to a higher credit utilization ratio for that specific loan, which may have a minor effect on the credit score, especially if it significantly increases overall utilization. Additionally, lenders considering new credit applications may view an “account in forbearance” notation as an indicator of past financial hardship, even if the credit score remains high.

The risk to a credit score arises if the borrower fails to comply with the terms of the forbearance agreement. Any missed payments that occurred before entering forbearance will remain on the credit report and continue to affect the score. Similarly, if a borrower does not make arrangements or becomes delinquent after the forbearance period concludes, these new negative marks will directly harm the credit score.

Managing Credit After Forbearance

As a forbearance period concludes, the decisions made regarding repayment can have distinct consequences for a borrower’s credit profile. Lenders offer several options to address the accumulated missed payments, such as a lump-sum payment, a repayment plan that spreads the missed amounts over a period, or a loan modification that permanently alters the loan terms. The chosen path will be reflected in the credit report and can influence future creditworthiness.

Successfully transitioning back to regular payments, either through resuming the original payment schedule or adhering to the terms of a new repayment plan or loan modification, is necessary for maintaining a positive credit history. Consistent on-time payments after forbearance demonstrate financial stability and responsible management of debt. This proactive approach helps to rebuild or sustain a favorable credit standing, which can be beneficial for future financial goals.

Conversely, failing to make arrangements with the lender or becoming delinquent on payments after forbearance ends will negatively impact the credit score. Such actions can result in new adverse marks on the credit report, which will be visible to potential lenders and may hinder access to new credit. Understanding post-forbearance options and their direct consequences on credit reporting is important for borrowers as they navigate the conclusion of their temporary relief period.