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Special payment holidays were made available during COVID-19 lockdowns. Millions of people took financial breaks while they couldn’t work. Although these special holidays have since been stopped, it is still possible to get a regular one. But should you? Do payment holidays affect your credit score? Loqbox unpacks the payment holiday baggage.

What is a payment holiday?

A payment holiday is when you agree with your lender to take a break from your repayments on a debt. This could be from a mortgage, personal loan or credit card. An agreement is made between you and your lender to pause payments on your account for a set period of time.

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Payment holidays are sometimes given to people struggling with loan or mortgage repayments. The break gives them some space to reorganise their finances, find work or juggle other credit responsibilities until they are in a position to resume their repayments. 

How do payment holidays work?

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While it’s possible to get time off from making your loan repayments, it’s really important to know that your interest charges continue to be added during that time.  As a result, your total balance could increase during your payment holiday and bring your minimum repayments up with it. This means  you have more to pay each month once your payment holiday ends.

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So, before you take a payment holiday, you need to be really clear of how you are going to make your payments once it ends. Speak to your lender about your situation and work out what will change after the holiday. A break might feel like a weight off your shoulders but it’s only temporary. Will things be worse for you when you start making payments again?

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Payment holidays might seem scary, but they are better than not making payments without telling your lender, which would be recorded as a missed payment. Missed payments  hurt your credit score, so speak to your lender about your options before that happens. 

How do I get a payment holiday?

If you want to take advantage of a payment holiday you need to speak to your lender. They will want to know why you need one and will probably ask questions about your finances, to work out how and when you will be able to start paying money back again, to make sure it’s the best idea for you.

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Your lender has the final say in whether you can have a payment holiday. They don’t have to say yes if they don’t feel it’s the best thing for you to do right now. However, even if they aren’t willing to offer a payment holiday, they might offer you some tailored support like reduced payments to help you.

Does a payment holiday affect credit ratings?

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Yes! Payment holidays will appear on your credit report and can negatively impact your credit score.

This can make it more difficult to get credit in the future so you need to be absolutely sure that it’s the right direction to go in before you take one. Taking a short payment holiday might be OK, but taking more than one or not sticking with your agreed terms can be harmful.

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The first six months of a payment holiday shouldn’t be reported as missed payments on your report. If you pay it off it shouldn’t hurt your credit score. If you were already behind with your payments when you took the payment holiday and have since overpaid you might see an improvement in your credit score. But this will depend on the debt and repayment levels.

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You might be wondering whether COVID-19 payment holidays affect your credit score? Payment holidays given because of the pandemic, between 17th March 2020 and 31st July 2021, don’t show on your credit report and don’t affect your credit score. But if you’re building up your credit score to specifically apply for a mortgage, read on!

Do payment holidays affect mortgage applications?

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Yes, because general (non-pandemic) payment holidays appear on your credit report, they will also impact your mortgage application.

Unfortunately, this can also be true of payment holidays offered during the COVID pandemic. Although the COVID-19 payment holidays won’t show on your credit report, they may be flagged in other information you give to the mortgage provider.

Will I lose my 0% deal if I take a payment holiday?

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There isn’t a standard answer to this. It will mainly depend on your lender and what they are willing to offer. If you aren’t sure whether you will lose a 0% deal by taking a payment holiday, the best thing to do is talk to your lender.

You could ask them to consider keeping the offer in place to allow you to get back on track easier without the additional interest building on your balance. It’ll be their decision, but you can always ask! 

What do I do if my credit score has dropped because of a payment holiday?

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Sometimes you might have no choice but to take a payment holiday or agree tailored support from your lender. Doing so might hurt your credit score and you could struggle to get a loan or a mortgage in the future. But thankfully, we can help!

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For proven ways to improve your credit score, get started with Loqbox! We report to the three main credit reference agencies (CRAs) in the UK, Experian, Equifax and TransUnion. You can use Loqbox Grow to make your regular membership payments boost your credit score.

Or maybe you’re looking to save for the future? Why not make those payments work for your credit score with Loqbox Save.

And if you’d like to make your rent count towards your credit history, you can easily do that with Loqbox Rent. No matter if you pay a landlord, local authority or friend, Loqbox can help.

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What other options do I have if I’m not given a payment holiday?

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The first thing you should do if you are struggling to pay off any loans, credit cards or mortgages that you have is speak to the lender 

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They will be able to look at your circumstances and offer what’s known as tailored support. This can change depending on the type of credit you are having problems with.

Tailored support will likely show up on your credit report for three years after the payment holiday arrangement ends, and your credit agreement may show as being in ‘arrears’ on your credit report. Have a good chat with your lender about what options you have and how to minimise the negative impact on your credit report.

If you’re struggling with your mortgage payments

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Your mortgage provider may be able to look at pausing or reducing your monthly payments, switching to interest-only repayments, or maybe even changing the terms of your mortgage.

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If you are finding it difficult to meet your loan or credit card repayments

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Tailored support from your lender could involve a pause on your account, reducing your monthly payments or building a repayment plan. As we mentioned above, this will likely show on your credit report so this is another topic to discuss with the lender.
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If debts are getting you down, there is help at hand

Debt is a real part of life that many people are dealing with on a daily basis. If you’re struggling with debt and feeling stressed about your repayments, the charity StepChange can offer you free and confidential advice. Don’t hesitate to speak to them if you need a hand!

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