The Financial Conduct Authority (FCA) has set out proposals for offering further payment holidays to mortgage customers and other borrowers during the winter lockdown. But what will this new wave of help mean for your credit report?
Applications for formal payment holidays were set to close on 31 October, with banks agreeing to offer 'tailored support' to borrowers who needed it thereafter which would be recorded on credit files.
However,the increasing restrictions being faced by borrowers in England during the 5 November to 2 December lockdown has caused the regulator to adjust its rules.
Under the new guidance, firms shouldn't report those in receipt of a payment holiday up until 31 January 2021 as having a missed payment. However, those that don't qualify for further payments and need to ask for 'tailored support' could be treated differently.
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.
A payment holiday is a deal between an individual borrower and their lender to pause regular borrowing repayments for a set period of time.
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.
In November, the FCA set out proposals for offering further payment holidays to mortgage customers and other borrowers.
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.
Applications for formal payment holidays were set to close on 31 October, with banks agreeing to offer 'tailored support' to borrowers who needed it thereafter.
The changes came after Prime Minister Boris Johnson announced that England would go into a full lockdown from 5 November to 2 December.
The proposals include extending payment holidays and other support to mortgage, loan, credit card, motor finance, rent-to-own, pawnbroking and buy now, pay later customers who are experiencing financial difficulties due to the coronavirus.
They will mean that those who haven't yet received a payment holiday would be eligible for two payment deferrals of up to six months in total, and those who have already had one payment holiday would be eligible for one more lasting up to three months.
Those with high-cost, short-term credit (HCSTC) loans who have not yet had a payment holiday would be eligible for a deferral of up to one month.
Under the proposals, customers would have until 31 January 2021 to request an initial payment deferral.
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 could apply to mortgages, loans, credit and store cards, plus catalogue credit, and would cover a payment holiday as well as reduced payments or increased credit limits.
However, these rules only apply to those receiving support until 31 October.
In its proposals, the FCA says firms shouldn't report those in receipt of a payment holiday up until 31 January 2021 as having a missed payment on their credit record.
However, those who have already had two payment holidays - and HCSTC customers who have already had one - would not be eligible for any additional payment deferrals, and must instead talk to their lender about getting 'tailored support'.
The FCA has already outlined a range of measures it expects to see firms offer as part of tailored support, including helping to avoid missed payments and giving realistic repayment timelines.
This tailored support may be reported on a customer's credit file, but lenders should always inform you as and when this is the case.
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.
Nor will an agreed payment holiday be recorded either for that lender or anywhere else in your overall credit report.
We asked James Jones from credit reference agency Experian to set out how this help is likely to appear on people's credit reports. He said: '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. 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 that the lender is expected to register an 'arrangement' flag.
James added: 'This should include the new temporary payment, and the start and end date of the arrangement.
'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.'
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 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.
Nevertheless, the current measures should help to reduce some of the worst damage if you think you're going to struggle to make repayments. It's much better to agree to a payment holiday than simply stop paying, as that would have a severe and immediate effect on your credit score.
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:
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.
This story was originally published on 9 April 2020 and has been regularly updated since then. The latest update was published on 6 November 2020, and included new information on how payment holidays and other financial help is set to be extended to 31 January 2021 due to England's winter lockdown. Additional reporting by Ian Aikman and Danielle Richardson.