New proposals from the Financial Conduct Authority (FCA) mean borrowers struggling to pay off debt should continue to get help after 31 October – but the support will be reflected on their credit report.
Currently, coronavirus-related payment holidays and other forms of financial help are not recorded by credit agencies – although lenders may be able to infer it from a gap in payments – but from November onwards that is all set to change.
Here, Which? looks at how payment holidays work, what credit reference agencies and lenders are doing to protect borrowers that claim the relief and what actions you need to take to protect your credit score – both before and after 31 October.
- For more about which lenders are offering payment holidays head to coronavirus: what it means for your mortgage, credit card, loan and savings and check out the latest coronavirus news and advice from Which?
What are the proposed changes from November?
The FCA’s proposals ask firms to continue to support customers who still need help beyond the end of the official measures that end on 31 October.
There will no longer be specific guidance for what help should be offered – instead, it should be tailored to suit customers’ needs on a case-by-case basis.
The FCA has outlined a range of measures it expects to see firms offer after this date including providing tailored support, helping to avoid missed payments and giving realistic repayment timelines.
In addition, lenders and credit reference agencies alike should resume reporting financial help taken by borrowers.
The FCA also says further help after the end of October should be recorded on people’s credit reports in accordance with the normal reporting practices, and firms must make the implications of this clear to customers when they set out the help on offer.
But what kind of implications should people expect? We asked James Jones from credit reference agency Experian to set out how this help is likely to appear on people’s credit reports.
‘Where short payment holidays are available as a built-in product flexibility feature – overpayments would be another example – we’d expect lenders to report status “U” during the holiday,’ explains James.
‘These are not treated as adverse in credit scoring as the U reflects that no payment was due that month.’
However, if a payment pause or reduction isn’t a feature, but is instead offered by a lender as a form of help, James says the lender is expected to register an ‘arrangement’ flag.
‘This should include the new temporary payment, and the start and end date of the arrangement,’ he says.
‘Lenders would then report any monthly payments received to the account in line with the original contract. So, for example, if you agreed 50% payments for four months, you’d emerge from the arrangement with two payments in arrears on your credit report, and you’d need to agree with the lender on how you would catch those up.’
Missed payments will negatively affect your credit score, and prospective lenders will be able to see the help you’ve received for some time to come. ‘The flag would remain visible on Experian reports for three years after the arrangement ended,’ says James. ‘While not usually a factor in credit scoring, flags are routinely reviewed by lenders during a credit assessment and could have an impact if it’s considered relevant.’
What is a payment holiday?
A payment holiday is a deal between an individual borrower and their lender to pause regular borrowing repayments for a set period of time.
On 17 March, the government announced homeowners who are up to date with their payments can apply for a three-month payment holiday on their mortgage. A day later, this policy was extended to landlords with buy-to-let mortgages.
As the coronavirus pandemic has progressed and the effect on household finances has worsened, further interventions have been needed.
In April, the FCA proposed a range of temporary measures it felt lenders could offer to support borrowers. These included a temporary payment freeze on loans and credit cards for those facing financial hardship as a result of coronavirus.
Arranging a payment holiday or a payment reduction means your account won’t fall into arrears and should give you time to get back on your feet.
- Find out more: how to get a three-month credit card or loan payment holiday
Will a payment holiday affect your ability to borrow in the future?
Payment holidays may not necessarily show up on credit reports or dent your credit score, as discussed above, but there are ways lenders could see that you’ve taken one.
That’s because your record will continue to be updated during the agreed payment holiday and will show the latest balance each month.
Lenders take into account your overall debt level and how much of your credit you use on your cards when they are assessing your affordability. So if large debts have built up, depending on their individual policies, you could find it more difficult to take on new borrowing.
Lenders can also use Open Banking to see whether people have temporarily stopped making payments in the past, thereby indicating whether they have taken a payment holiday. MoneySavingExpert’s Martin Lewis heard directly from the FCA that this may be taken into account as part of a lender’s assessment of a credit application.
The FCA’s updated guidelines for mortgage payment holidays confirm that this is the case.
Nevertheless, the current measures should help to reduce some of the worst damage and if you think you are going to struggle to make repayments. It’s much better to agree to a payment freeze than simply stop paying as that will have a severe and immediate effect on your credit score.
- Find out more: free debt advice contacts
Will a payment holiday affect your credit score?
In April, the FCA said lenders should ensure the temporary measures don’t affect credit reports and scores.
At the time, the UK’s three main Credit Reference Agencies (CRAs) pledged to protect credit scores during the coronavirus pandemic.
Experian, Equifax and TransUnion agreed to an ‘emergency payment freeze’, with new guidance which ensures an individual’s credit score is not affected over the duration of the agreed payment holiday.
The emergency payment freeze can apply to mortgages, loans, credit and store cards plus catalogue credit, and will cover a payment holiday as well as reduced payments or increased credit limits.
However, these guidelines only apply to those receiving support until 31 October. The FCA plans to allow firms to record further support requested on credit reports from November.
Find out more: how to check your credit score for free
How will a payment holiday look on your credit report?
Because you’ve agreed to a payment holiday with your lender, the payment status in your record with that lender won’t change.
So if your account was up to date, it will still appear that way. If it was in arrears, it will continue to show in arrears but it won’t get any worse.
Importantly, you will not be shown as having missed payments or as having built up arrears – things which can damage your credit score if you receive help before 31 October.
Nor will an agreed payment holiday be recorded either for that lender or anywhere else in your overall credit report.
- Find out more: coronavirus: how to apply for a mortgage payment holiday.
How to protect your credit score when using a payment holiday
To ensure your credit report and score are safeguarded you should take these steps:
- Ensure you continue to make regular payments until you have discussed your position with your lenders.
- Agree with your lender whether you should use a payment holiday, lower payments or raise credit limits.
- Agree the length of time the special measures should last. It could be up to three months.
- Once you have this agreement in place, Experian, Equifax and TransUnion will apply the ’emergency payment freeze’ to the relevant credit record on you if agreed before 31 October.
- Ensure you have an agreed ’emergency payment freeze’ with each and every one of your lenders whom you might not be able to pay before you reach the stage of missing a payment. If you miss a payment, you could damage your score.
- Check your credit report and score every month and if you spot mistakes or arrears building up while a freeze was agreed, contact the lender first. If that doesn’t resolve the situation, you should contact the CRA.
It’s vital that you don’t just cancel direct debits as that can result in a missed payment being recorded on your report. A missed payment can take 130 points off your Experian credit score.
Which? calls for extension of COVID-19 financial support
We’re calling for the financial regulator to extend its help for consumers facing financial difficulties due to coronavirus into 2021.
Our submission to the FCA recommends the following protections to prevent households facing a financial cliff-edge when payment holidays, interest-free overdrafts and the furlough scheme come to an end.
- Payment holidays should be extended by three months until 31 January 2021. Lenders should continue to offer options such as payment rescheduling or freezing interest, if they are right for the customer.
- It’s too early to return to existing forbearance rules, as firms with stretched resources will be unable to offer tailored support to struggling customers.
- Credit reports should continue to be unaffected by payment holidays. Anyone who accesses a payment holiday must not have their long-term creditworthiness negatively affected.
- Timescales for complaints should be reduced so consumers can get urgent support. We have seen cases of slow handling of complaints by banks and the Financial Ombudsman.
Gareth Shaw, head of money at Which?, says: ‘The regulator has acted quickly and effectively to help those struggling due to the pandemic, but it must be prepared to take further bold action to prevent millions of people from being hit by a perfect storm of financial pressures in the coming months.
‘The huge number of payment holidays taken highlights the scale of financial difficulty people in this country are facing – a situation that is likely to become worse as support measures such as the furlough scheme come to an end.
‘The regulator must treat all consumers fairly – ensuring that financial support is still provided to those who need it and also available for those who may face financial problems for the first time after 31 October.’
This story was originally published on 9 April 2020 and has been updated since. The latest update was published on 22 September and included new information on how payment holidays and other financial help will affect credit scores after 31 October. Additional reporting by Ian Aikman and Danielle Richardson.