Coronavirus payment holidays to be extended - how will it impact your credit score?

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.

• Are you considering asking for a payment holiday, or have you applied for one in the past? If you'd like to tell us about your experience, please email money-letters@which.co.uk

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.

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.

What are the proposed payment holiday changes from November?

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.

But on 2 November, the FCA announced proposals to extend mortgage payment holidays, and then on 3 November it announced plans to also give other borrowers affected by the coronavirus crisis further support.

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.

• Find out more: coronavirus mortgage payment holidays

Will a payment holiday impact your credit score?

March to October payment holidays

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 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.

November payment holidays and ongoing 'tailored support'

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.

• Find out more: how to check your credit score for free

What will support look like 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.

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.'

• Find out more: how to improve your credit score

Will a payment holiday affect your ability to borrow in 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.

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.

• Find out more: free debt advice contacts

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 lender.
• 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.
• 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 your credit reference agency.

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.