Does Forbearance Affect Your Credit Score?

Forbearance offers a temporary reprieve for individuals facing financial difficulties by allowing them to pause or reduce their loan payments. This financial arrangement provides a safety net during financial hardship, such as job loss or illness. Understanding how forbearance interacts with one’s credit report and credit score is important. This article clarifies forbearance and its credit implications.

Understanding Forbearance

Forbearance is a temporary agreement between a borrower and a lender that allows for a pause or reduction in loan payments for a specified period. It is offered across various loan types, including mortgages, auto, and student loans. Borrowers seek forbearance during financial hardship, such as job loss, medical emergencies, or natural disasters.

During forbearance, loan terms are temporarily altered. While payments may be suspended or lowered, interest often continues to accrue on the outstanding principal balance. Accrued interest becomes due at the end of forbearance, either as a lump sum, through a repayment plan, or by being added to the principal balance via a loan modification.

Credit Reporting During Forbearance

When a loan enters forbearance, this status is reflected on a credit report. Credit reporting agencies note the account as in forbearance, using terms like “deferred payment,” “payment relief,” or “account in forbearance.” Terminology varies by lender and agency.

Reporting depends on the account’s status before and during forbearance. If payments were current before forbearance and not due during the agreement, the account can be reported as “paid as agreed” or “current.” Conversely, missed payments before forbearance still appear on the credit report, as forbearance addresses future payments, not past defaults. Lender reporting practices significantly influence how forbearance appears.

Impact on Credit Scores

Credit report information directly influences a credit score, determined by factors like payment history, amounts owed, credit history length, new credit, and credit mix. Payment history is a significant factor. If a loan is reported as “current” or “paid as agreed” during forbearance, the direct impact on payment history can be minimal. Entering forbearance itself does not automatically result in a negative mark, provided the lender reports it favorably.

However, a forbearance notation on a credit report, even if positive, could be considered by future lenders assessing risk. While it doesn’t directly lower a credit score like a missed payment, some lenders might view past forbearance as an indicator of financial distress. Forbearance’s objective is to prevent new delinquencies, which would otherwise significantly damage a credit score.

Navigating Post-Forbearance Repayment

After forbearance concludes, resuming regular loan payments is important for maintaining positive credit. Lenders offer options for addressing paused or reduced payments, including a lump-sum payment, a repayment plan spreading missed payments, or a loan modification altering terms. Another option is a deferral, adding missed payments to the loan term’s end.

Proactive communication with the lender is crucial to determine the most suitable repayment option and avoid future financial strain. Failing to resume payments or adhere to a new repayment plan after forbearance ends will result in delinquencies reported to credit bureaus. Such missed payments significantly impact credit scores, making it difficult to obtain new credit or favorable interest rates.