Loan forbearance can save your credit – Washington Post

By: Michelle Singletary
Date: January 20, 2019

Lenders are offering a wide variety of help to workers impacted by the partial government shutdown, but one type of assistance in particular can save your credit rating.

I’ve heard from some readers who fear that their credit scores will drop if they miss a loan payment due to not getting their paychecks. And they aren’t being paranoid.

Your credit score is used as part of the lending process to determine how much of a credit risk you might be. The higher your score, the better borrower you are considered to be.

The biggest score-slayer is late payments. Your payment history accounts for 35 percent of your score. A missed payment can cause your score to drop, which results in a higher interest rate when you apply for a loan. Further, a late payment remains on your credit file for seven years.

Here’s why workers affected by the shutdown should be worried if they can’t make their loan payments: The most recent late payments can do a lot of damage to your credit score – more so than those that happened years ago, according to FICO, the most widely used scoring model. FICO scores generally go from 300 to 850. FICO also creates industry-specific scores, which can range from 250 to 900.

“A newly reported 30-day late payment could impact the FICO score by as much as 100-plus points, depending on the credit profile of the consumer,” according to Ethan Dornhelm, FICO’s vice president of scores and predictive analytics.

Got excellent credit? A late payment can really hurt your score.

“If the consumer’s credit file was pristine, with no missed payments reported previously, the newly reported 30-day late payment is likely to have a greater impact,” Dornhelm said. “With a 60-day late payment, it will likely continue to have a significant impact on the FICO score due to the increased seriousness of the delinquency.”

But don’t despair. Your FICO score can and does bounce back up after missed payments, he said.

“How long it takes for this rebound depends, both on the overall credit profile of the consumer before their credit slip-up, as well as the extent of the slip-up,” he said. “If the consumer was 30 days late on just a few credit accounts – among many other accounts in their credit file – then, assuming that they immediately get caught back up on that account, their score can recover within a matter of months.”

If you know you can’t make your loan payments now because of the shutdown, ask your lender for a forbearance, which can apply to any type of loan.

Under a forbearance, the debt is not forgiven, but a borrower who is suffering from financial difficulty is allowed to stop making payments, according to Eric Ellman, senior vice president for policy and legal affairs for the Consumer Data Industry Association (CDIA), which represents credit-reporting companies.

Shortly after the shutdown began, the association issued guidance to companies that send payment data to the credit bureaus reminding them to use the right code to indicate a consumer has been put in forbearance.

It’s the best of an unfortunate situation.

“A forbearance is supposed to have a neutral treatment on their credit history, meaning it’s neither positive or negative,” Ellman said.

Here’s how this works, according to Jeff Richardson, vice president and group head of marketing and communications for VantageScore Solutions, a credit-scoring system created by the three major credit bureaus, Equifax, Experian and TransUnion.

Once a loan is entered into forbearance status, a lender temporarily suspends the required payments. This means that although the loan is still included in calculating credit history (which has a positive impact the longer you have an account), other elements such as balance or payments are not included in the score calculation (which would have had negative impact if a payment was missed).

“In other words, consumers get the benefit of owning these accounts in terms of length of credit and credit composition, while not considering their balance as current debt,” Richardson said. “Previous payment and delinquency history related to the loan would continue to be included in the score calculation.”

One thing consumers should make sure they do is get it in writing that they’ve been given a forbearance, he said. “Don’t assume it, as those payments would be reported late without the forbearance coding.”

Also double-check your account statement, because there should be an indication that nothing is owed, he said.

It may be hard to ask to skip some payments, but it’s better than risking a ding to your credit history.