Loan relief won't damage your credit score
Report will reflect payment holiday
If you’re worried that taking a payment holiday may negatively impact your credit report, relax.
If your finances have taken a hammering due to the Covid-19 pandemic, you may be considering taking a payment holiday. But if you’re worrying this might negatively impact your credit report, you can relax.
A payment holiday is an agreement between you and a lender allowing you to temporarily stop or reduce your monthly repayments for a defined period. The payment holidays offered by most of the banks are for three months until the end of June.
You should only consider the payment holiday as a last resort and if you do not qualify for relief on any credit life insurance you may have.
Your credit report is an important tool used by credit providers when they decide whether or not to extend credit to you.
Lee Bromfield, the chief executive at FNB Life, says taking a payment holiday doesn’t adversely affect your credit report, provided you stick to the terms and conditions of the payment holiday as set out by your bank.
“All banks have a responsibility to report information to the credit bureau[s] regarding your paying behaviour. The relief will not reflect badly on your credit report since once the relief period is over, you begin repaying, and like any other account, the repayment will reflect. Consistent and timeous repayments will positively contribute to your credit rating,” he says.
Should you be granted a payment holiday, your lender will provide the credit bureaus with the appropriate information to identify your payment holidays against your specific accounts.
Jeannine Naudé-Viljoen, the general counsel for credit bureau TransUnion Africa, says that as long as a deferred payment date (which will be future date) is supplied by your lender to the credit bureau, your account will reflect as updated until the payment becomes due and payable.
The deferred payment date will reflect on your credit report for each account that is deferred or where the term is extended.
She says that provided you have correctly applied for a payment holiday and the lender submits the payment holiday flag to the credit bureau, your immediate score will not be impacted.
“What we cannot comment on is how lenders will consider this in future when extending credit. This pandemic will have a definite impact on how lenders extend credit going forward – the bureau score is only one factor that could be considered when making risk-based decisions.”
Your credit report comprises four components: your personal information, the past 24 months of your payment history, any default judgments, and enquiries by creditors every time you apply for credit. Credit bureaus also assign to you a credit score.
The decision to take a payment holiday is not to be taken lightly. Lenders typically continue charging interest and fees on your accounts, making your repayment term longer and your balance higher in the long run.
With some lenders, you are required to pay in part – usually just enough to cover the interest.
If you default on the payment holiday, it will negatively impact your credit score, which is a measure used to determine whether you qualify for a loan and how much interest you should pay. A high score indicates you are a low risk borrower, while a low score means you’re a high-risk borrower.
According to Experian, a credit score of 650+ means you will easily obtain credit at low interest rates. A score of between 600 and 650 is very good and means you’ll qualify for credit at good rates. A score of between 550 and 600 is still good and comes with acceptable rates, while anything below 550 is sub-prime, meaning you will either struggle to get a loan or not qualify at all.
Before you jump at the offer of a payment holiday, check if your debt is covered by a credit life insurance policy. Depending on the terms, you may not take a payment holiday if you can claim against your credit insurance policy.
Credit life insurance covers you for loss of income or inability to earn an income. Bromfield says that on FNB’s policy this includes scenarios where you need to take unpaid leave or you don’t earn when you can’t work.
Nkazi Sokhulu, the chief executive at Yalu, a provider of credit life insurance, says families can spend years paying off debt in such situations, unaware that they have insurance to cover what they’ve borrowed.
He says that most credit life insurance providers cover you for loss of income due to retrenchment or inability to earn an income and death.
Lesiba Mashapa, company secretary at the National Credit Regulator, says the regulator supports all measures taken by stakeholders to provide relief to consumers at this time.