Does Forbearance Affect Your Credit Score?

Forbearance offers a temporary pause or reduction in loan payments during financial hardship. Many individuals consider this option, wondering about its impact on their credit standing. The relationship between forbearance and credit scores is not always straightforward, as it depends on several factors, including the type of loan, lender reporting practices, and the borrower’s actions. This article clarifies how forbearance can affect your credit score.

Understanding Forbearance and Credit Reporting

Lenders report account activity to the three major credit reporting agencies: Equifax, Experian, and TransUnion. When a loan enters forbearance, this status is noted on the credit report. The notation often indicates the account is in forbearance or payments are deferred.

A key distinction is whether the account was current before forbearance and how it is reported during the forbearance period. If a borrower was current before entering forbearance and the lender reports the account as “current” or “payments deferred” during the agreed-upon period, the forbearance itself is not considered a negative event. This reporting practice prevents new negative marks, such as missed payments, from appearing on the credit report. The borrower must adhere to the terms of the forbearance agreement to maintain this status.

Conversely, if a borrower was already behind on payments before entering forbearance, those pre-existing delinquencies remain on the credit report. Forbearance does not erase past negative payment history. Forbearance aims to prevent additional missed payments during financial difficulty, mitigating further damage to the credit score. Lenders may have different policies on how they report forbearance, making it important for borrowers to confirm their lender’s specific reporting practices.

Credit Score Components and Forbearance

Credit scoring models, such as FICO and VantageScore, use various components to calculate a credit score. These include payment history (35% of a FICO Score), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Understanding how forbearance interacts with these components helps assess its credit impact.

Payment history, the most significant factor, is directly influenced by how forbearance is reported. If an account is reported as current or payments deferred during the forbearance period, new negative payment entries are avoided. This prevents further adverse effects on the payment history component, which would otherwise occur with missed payments. Forbearance prevents this scoring component from deteriorating.

The “amounts owed” component can see subtle influences. While pausing payments without increasing the principal balance does not directly impact credit utilization, interest may continue to accrue. An increase in the total amount owed could subtly affect this component, though this effect diminishes once regular payments resume. Forbearance does not affect the length of credit history, as the account remains open. Similarly, the “new credit” and “credit mix” components are not directly impacted by an existing account entering forbearance.

Potential Indirect Influences on Credit Scores

While properly managed forbearance may not directly harm a credit score, several circumstances can still have an indirect impact. Any delinquencies or missed payments incurred before a forbearance agreement begins remain on the credit report and continue to negatively affect the score. Forbearance does not retroactively remove these entries. The relief provided by forbearance is forward-looking, aiming to prevent new negative marks.

The period after forbearance concludes is important. Failure to resume payments or establish a new repayment plan, such as a loan modification, can lead to new delinquencies being reported. These new missed payments will significantly damage a credit score, potentially undoing any benefits of the forbearance. Borrowers must proactively engage with their lender to understand their post-forbearance options, which may include a lump-sum payment, a repayment plan, or a loan modification.

Applying for new credit while in forbearance can present challenges. Although the forbearance notation is not inherently negative, prospective lenders may view it as an indicator of financial hardship. This perception could influence a new lender’s decision to approve credit or the terms offered, indirectly affecting credit opportunities. Some existing lenders might reduce or freeze credit limits on other accounts, such as credit cards, if they observe a borrower in forbearance. This action could increase a borrower’s credit utilization ratio, a factor in credit scoring, indirectly impacting their score.