Does Forbearance Hurt Your Credit Score?

Forbearance offers a temporary reprieve from loan payments, providing financial relief during periods of hardship. This temporary pause in payments can have varying effects on a credit report, depending on the type of loan and the specific terms agreed upon with the lender.

Understanding Forbearance

Forbearance is an agreement between a borrower and a lender for a temporary suspension or reduction of loan payments. This arrangement is offered when a borrower experiences financial difficulty, such as job loss, illness, or other unforeseen circumstances. The primary goal of forbearance is to help borrowers avoid default and potential foreclosure by providing short-term financial flexibility. Interest generally continues to accrue during forbearance, but the borrower is not considered delinquent if they adhere to the agreement. Forbearance applies to various loans, including mortgages, student loans, and credit cards. Specific programs, like those offered under the Coronavirus Aid, Relief, and Economic Security (CARES) Act for federally backed mortgages, provided specific guidelines during the COVID-19 pandemic.

How Forbearance is Reported

The way forbearance is reported to credit bureaus can vary based on the type of loan and the specific agreement with the lender. Under the CARES Act, for example, if a borrower with a federally backed mortgage was current on their payments when they entered forbearance due to COVID-19-related hardship, their account had to be reported as “current” or “paid as agreed” during the forbearance period. This meant the account status did not reflect a missed payment or delinquency.

For other types of forbearance agreements, lenders have discretion in how they report the account status. Some lenders may report the account as “current” with a notation of forbearance, while others might indicate a deferred payment status. It is important for borrowers to confirm with their lender how their account will be reported before entering into a forbearance agreement. If payments are missed without a formal forbearance agreement, or if the terms of the agreement are not met, the account can be reported as delinquent, which can negatively impact a credit report.

Credit Score Implications

The impact of forbearance on credit scores correlates with how the account is reported to credit bureaus. If an account was reported as “current” or “paid as agreed” during forbearance, as was often the case for federally backed mortgages under the CARES Act, the forbearance itself did not directly lower the borrower’s credit score. Credit scoring models do not factor in a forbearance notation as a negative event if the account status remains current.

However, if a loan was already delinquent before entering forbearance, or if the forbearance agreement was not adhered to, the negative payment history would persist, leading to a negative credit score impact. Even when reported as current, there can be indirect effects. For example, if interest accrues during forbearance and increases the outstanding balance, a higher credit utilization ratio on revolving accounts could indirectly affect scores. While a forbearance notation might not directly lower a score, future lenders may view it as an indicator of past financial hardship, potentially influencing new credit applications or interest rates.

Navigating the End of Forbearance

As the forbearance period approaches its end, proactive communication with the loan servicer is important. Borrowers should contact their lender 30 to 90 days before the forbearance concludes to discuss repayment options and establish a clear plan. Ignoring the end of forbearance can lead to the account being reported as delinquent if payments are not resumed, harming credit. Lenders offer several options to address the missed payments:
A lump-sum payment of the missed amount.
A repayment plan, where the missed payments are spread out and added to future regular monthly payments.
A payment deferral, which moves missed payments to the end of the loan term or allows payment upon the sale or refinancing of the property.
A loan modification, which permanently alters the terms of the loan, such as adjusting the interest rate or extending the loan term, to make monthly payments more affordable.
Adhering to one of these repayment solutions prevents adverse credit reporting and maintains financial stability.