Freezing mortgage payments – Does it hurt your credit score?

With millions of Australians either out of work due to COVID-19 or facing reduced hours and reduced pay, many people are slipping into financial hardship.

Many banks and lenders have stepped in to help their customers by announcing financial hardship measures. But Australians remain unclear about what impact a loan repayment freeze will have on their credit score.

Comprehensive credit report (CCR), introduced back in 2018 also has an impact on the sharing of data between banks and credit reporting agencies. Especially with many Australians now receiving financial assistance from the government.

Should you be concerned about your credit report then?

Mortgage holders

If you have a home loan, there’s good news regarding your credit score. Your score won’t take a hit if you need to put repayments on hold for six months.

As long as your payments were up to date before the pandemic, your lender won’t record any missed payment, according to the Australian Banking Association.  

However, before you decide to take up a loan repayment moratorium or repayment holiday, keep in mind that interest will still accrue during the six months. You’ll be required to pay back the funds once the time frame is over.

Instead of deferring repayments, you might consider extending your loan term (which will lower your repayments) or switching to interest-only repayments (if you qualify).

Current market interest rates are very low, so you may be able to negotiate a lower interest rate, or get a better rate elsewhere.

What about credit cards and personal loans?

Similarly, most banks have paused minimum credit card repayments for the time being. However, you’ll still accrue interest on your principal debt.  

Since interest rates are so high on some credit cards, you could find you have a significantly increased balance after six months, if you don’t make any repayments.

Switching to a balance transfer card may be a good option at this time. You may be able to find a low or 0% interest card for up to 22 months, but check the fine print as interest on these cards can skyrocket at the end of the initial period. You’ll want to make sure that you can pay off a substantial amount of the debt in that time to avoid accruing greater interest.

What effect does not paying your rent or utilities have on your credit rating?

Fortunately, any missed or overdue rent payments or late utility bills are excluded from your credit report unless they become a default. Late payments only become default if they exceed $150 and are more than 60 days overdue.  

However, you must get in touch with your provider’s hardship team to negotiate an arrangement for the payment of your bills. The Financial Rights Centre has asked utility companies to ‘guarantee’ that there’ll be no impact on credit reports if financial assistance is offered during this time. The government has announced a six-month ban on eviction for tenants if they can’t pay rent as a result of the pandemic.

The main takeaway from all this is that it’s extremely important to maintain lines of good communication with your lender, landlord and utility provider if you find that you need to negotiate a hardship arrangement.  

If you are proactive in your communication, you can rest assured that your credit rating will be protected.