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Does pausing payments affect your credit score?

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Lenders responded to the recent spike in COVID-19 cases by offering some customers a further four-month payment pause. But does this impact your credit score long term?

Although an extension of up to four months may be available, it won't be automatic. The additional pause period is still only a temporary measure and it will be reserved for those customers that really cannot afford to make repayments right now but have a reasonable chance of doing so if given additional time.

At the end of your current and any future payment deferral, or any other form of assistance received, if you continue to be severely financially impacted and are unable to make your normal repayments, it's best to keep in contact with your lender so you can determine the best long-term solution.

Although the extension of payment pauses has been widely covered over the past few weeks, there is still a lot of misconceptions around what the pauses mean for your credit report. It is important that you are aware of what a payment pause means for you in the long term.

Consider your payment options carefully

Payment pauses are temporary, and they may not be the best option for everyone given the overall amount owed will likely increase because of the pause.

Lenders are in the process of contacting their customers to discuss the options that might be available for them to get back on track. Take this opportunity to discuss with your lender how to get back on top of your repayments that were deferred during the COVID-19 assistance.

Rather than extending your payment deferral period, if you are able to, it may be in your interest to begin repayments. Lenders may offer options such as accepting lower repayments for a period, extending the term of the loan, converting to interest only payments for a period of time or a combination of these.

The sooner you restart repayments, the less chance there is of your debt growing to unmanageable levels.

The impact of COVID-19 assistance on your credit report

Your credit report includes your repayment history information which is a 24-month view of whether you pay your loan and credit accounts on time. If you have been granted COVID-19 assistance from your lender, a payment pause/deferral will usually not be reported as a late or missed payment in your credit report.

Instead, repayment history during the deferral period will usually be reported as "up to date" or will be blank, often depending on whether you were up to date with repayments at the start of the payment pause or were already in arrears.

At the end of a payment pause, your repayment history might be reported differently depending on the how you and your lender intend to get you back on schedule with repayments. For example, if you agree to restructure your loan at the end of the payment pause period, your repayment history will essentially re-start and be reported as "up to date", with future repayment history reported against the new payment obligations of your restructured loan.

Your credit score and access to future credit

Seeking assistance from your lender because of COVID-19 will not exclude you from applying for credit in the future. Your credit report is only one of the factors that lenders consider when they assess loan applications. Other factors include your income, expenses, and employment status which are not factored into credit report or credit scores provided by the websites.

Although life has changed since COVID-19, the requirement to repay debt hasn't. It's just been paused. Remember the more you communicate with your lender, the easier you can agree on a manageable solution to make your regular repayments.

Consumer education website CreditSmart has demystified the key questions around the impact of COVID-19 payment pause extensions on your credit report.

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Mike Laing is chief executive of the Australian Retail Credit Association, which founded creditsmart.org.au to help consumers understand how credit reporting operates in Australia. He has served as a director and chair of various financial services and payment companies and has led businesses in Australia, New Zealand, the United Kingdom, and Ireland. Mike holds a Master of Commerce (Hons I), is a graduate member of the Australian Institute of Company Directors, and a member of the Chartered Institute of Arbitrators.
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