Missing your debt payments can significantly impact your credit score. This is because your payment history is the most important factor affecting it. So if you’re in a financial bind and are struggling to pay your bills on time, loan deferment may be an option worth considering.

Loan deferment allows you to pause your payments and avoid delinquencies from appearing on your credit report. However, depending on your lender and the type of loan, deferred payments can still negatively affect your credit score.

What Is Loan Deferment?

Loan deferment is a temporary postponement of loan payments, usually granted to borrowers who are experiencing financial hardship. It can allow you to temporarily stop making payments on your loans, which can help you get back on your feet financially. Deferment is typically offered for a specific period of time, after which you’ll be required to resume making payments.

Not all loan deferments are created equal, however,l and how it will affect your credit score varies depending on the type of loan you have. The two main types of loan deferment are:

• Forbearance. This is a temporary reduction or suspension of loan payments. Interest may continue to accrue during forbearance, and the borrower will be responsible for paying it back at a later date.

• Deferment. This is a temporary postponement of loan payments, during which interest may or may not accrue. Depending on the loan program, the government or the lender may pay the interest during the deferment period.

How Loan Deferment Can Affect Your Credit Score

Your credit score is a three-digit number that represents your creditworthiness as a borrower. It’s calculated based on your credit history and is what banks and other lenders use to determine the likelihood you’ll repay a debt as agreed.

One of the factors that influence your credit score is your payment history. Late or missed payments negatively impact your credit score. And although the goal of loan deferment is to temporarily stop lenders from collecting, it can still affect your credit score, depending on the type of loan and your lender’s policies. 

Here are a few things to keep in mind:

• Federal student loans. Deferment of federal student loans does not have a negative impact on credit scores, as long as the payments are deferred through a government program.

• Private student loans. The effect of deferment on private student loan credit scores can vary by lender. Some private lenders may report deferred payments as past due, which can have a negative impact on credit scores.

• Mortgages. Deferment of mortgage payments can have a negative impact on credit scores, as the lender may report the deferred payments as past due.

• Credit Cards. Deferment of credit card payments can have a negative impact on credit scores, as the lender may report the deferred payments as past due.

Alternatives To Loan Deferment

Loan deferment can be a great option to avoid default, but it’s not without its costs. Yes, continuing to make loan payments during times of financial hardship can be challenging, but there are a few options that may be available to help and you should consider. 

Here are a few suggestions:

• Loan Modification. This is a change to the terms of the loan that makes it more affordable. It can include a lower interest rate, a longer loan term, or a change in the type of loan. Some mortgage lenders may offer loan modification options if you’re experiencing financial hardship.

• Income-Driven Repayment. This is a program that adjusts the loan payment amount based on your income. It is available for federal student loans and may help make payments more affordable if you are experiencing financial hardship.

• Refinancing. This is the process of obtaining a new loan to pay off an existing loan. It may be an option worth considering if you have a good credit score. Refinancing can help lower interest rates, reduce monthly payments, or change the loan term.

The Bottom Line

Loan deferment can affect your credit score, depending on the type of loan and the lender’s policies. Fortunately, it’s not your only option. If you are experiencing financial difficulties, it’s a good idea to talk to your lender to understand your alternatives and how they can affect your credit score.

It’s important to keep in mind that you can always rebuild your credit. One of the ways to do this is with credit restoration, the process of removing negative information from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.