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Apr 18

How does coronavirus affect your credit score?

Reading Time: 6 mins

With so many changes to financial services in the last month, how does coronavirus affect your credit score?

From mortgage holidays to furlough pay, let’s take a look at what does (and doesn’t) impact your credit score during the COVID-19 crisis.

If you still have questions about your credit score and coronavirus, put your question on our Messageboards and we will answer them asap!

Mortgage Holidays

Mortgage lenders have agreed that customers can take a three-month payment holiday if they’re going to struggle to pay their mortgage.

This means you won’t have to make your regular payment for three months. However, the amount is added to the end of your mortgage term – and interest still accrues. This means you could end up paying thousands more for your mortgage overall.

How to get a mortgage holiday

You need to contact your provider to arrange the holiday. Most are now offering an online service to make it quick and easy to apply for the payment freeze.

Will a mortgage holiday affect my credit score?

At the moment, a mortgage holiday will not affect your credit score. You must, however, arrange the holiday with your provider. You can’t just skip your payments – that counts as a default which will HUGELY affect your credit rating.

This is only a temporary measure, however. In the future (although nobody knows when, most assume by June 2020), a mortgage holiday will affect your credit score.

So, if you think you need one – or will need one in the next couple of months – apply now.

Will being furloughed affect my mortgage application?

how does coronavirus affect your credit score and mortgage?

Over half the workforce have been furloughed (or will be in the coming weeks). Through the Job Retention Scheme, this means the Government are paying 80% of employee salaries for companies that are closed due to coronavirus.

This has a long-term impact for anyone currently involved in a mortgage application or planning to apply for a mortgage in the next year or so.

Mortgage providers look at your annual salary to work out the affordability of the home loan you’re asking for. With the reduced income of 80%, this is likely to affect your ability to borrow.

For those on a salary below £40,000 a year, this won’t have a significant impact, although it will still reduce how much you can borrow. However, if you’re earning £100,000 a year – and now face a 20% pay cut via furlough – it’ll have a huge effect on your ability to afford a mortgage.
Being furloughed also suggests your job is at risk. The idea behind the scheme is to help businesses keep staff on after the crisis – but you could still be made redundant when businesses can reopen. This makes you a less attractive customer for mortgage providers.

What if I’ve had my mortgage application accepted?

If you’ve had a mortgage application accepted, but have yet to buy the house, your provider can enforce a revaluation of the property and your affordability of the mortgage.

Bear in mind, however, that the current stagnation in the housing market means even if the amount you’re able to borrow reduces, the anticipated drop in house prices will be similar.

Will furlough affect my credit score?

Being furloughed won’t directly affect your credit score – especially if your employer is topping up the remaining 20%. However, if it impacts your affordability score on a mortgage application, it could mean you get rejected for the amount you planned to apply for. This will damage your credit score – and that makes it even harder to get a mortgage.

If you want to buy a house soon, talk to an independent mortgage broker about your situation. They’ll have the best advice for your circumstances – and make sure you don’t make applications you’re likely to get rejected for, too.

Loans and Credit Card Freezes

Credit card and personal loan providers are also allowing payment holidays.

For credit card providers, this is a three-month holiday from the date requested. Again, the assumption is that this will run until June 2020 (the end of the furlough scheme at the time of writing).

Loan providers are offering holidays on individual terms, so make sure to check with your provider.

How do I freeze my credit card or loan repayment?

You need to contact your provider, ideally in writing, to confirm the payment holiday. Skipping this step results in defaults on your credit report that’ll take YEARS to recover from.

What about the interest?

Interest will accrue while you’re on a payment holiday. When the freeze ends, you’ll need to pay this interest with your first bill – so it could be a much bigger bill than you expected.

You can request an interest rate freeze if you’re in dire straits. Read more about it in our payment freeze article here.

Are payday loans included?

At first, payday loans weren’t included in the arrangements. Now, they’re offering payment holidays – but only for a period of one month, instead of three.

The interest rate on these loans is extortionate – so if you can make the payment, do so. If you’re struggling to manage, request a holiday for one month – but bear in mind that the interest will accrue.

Car Finance and Loans

Coronavirus affects your credit score if you don't arrange car finance holidays in advance

A large monthly expense for many households, car finance wasn’t initially included in the FCA guidelines for payment holidays.

As of 17th April 2020, however, motor finance providers are expected to offer a three-month payment freeze for those in need. They also stipulate that firms should not use car depreciation to affect the end-of-term balloon cost, and that finance firms shouldn’t repossess cars while an arranged payment holiday is in place.

Will a car finance holiday affect my credit score?

If you arrange the holiday with your car finance company, it won’t affect your credit score. An unarranged holiday – where you simply don’t pay – will negatively affect your score.

All three credit reference agencies have agreed that payment holidays won’t affect credit scores at this time. Holidays show up as an up-to-date payment on your credit report – so it’s not recorded as a default, or a missed or late payment.

Bank Overdrafts

Bank overdraft charges were set to change in April 2020 – but many banks have delayed this to reflect the additional cost it could have for customers already in financial difficulty.

Banks also are offering at least a £300 interest-free overdraft for customers who already have an overdraft agreement (they may not offer this to new customers or overdraft arrangements).

Most have extended this to follow the FCA’s guidance to the first £500 in an overdraft as interest-free.

If you have a larger overdraft than that, you’ll pay interest as usual on anything over the interest-free amount. If your overdraft is smaller, say £200, you’ll only get up to that amount interest-free.

How will an overdraft affect my credit score?

People who already have an agreed overdraft, and who don’t go over the limit, won’t see their credit score change at all.

If you extend your limit, or go over it unintentionally, this will affect your credit score. It’ll also affect your report if you don’t currently have an overdraft but apply for one.

How do I claim the interest-free overdraft?

Most banks are offering the interest-free amount automatically. However, some still require a manual agreement. It’s best to contact your bank to find out your individual overdraft arrangements. You can find out the information online if you have online banking set up, which will save you a lot of time waiting on hold!

Why coronavirus could impact your credit score

The credit reference agencies that create your credit score look at many factors to determine your report.

One of the key factors is how much of your credit limit you’re using. If you usually only use 15% of the credit available to you, but suddenly use 80%, that’s a red flag. It’ll cause your credit score to temporarily drop for several months, until your spending reduces again.

As many of us face reduced hours, furloughed pay, or redundancy, we’re turning to our overdrafts and credit cards to see us through the next few months. This means your credit score is likely to take a hit.

In addition, if you apply for new credit this makes your score dip, too. Applying for several things in a short space of time – such as a new credit card and a small loan to cover your rent – that’s another red flag. Your credit score will drop for several months. If you get rejected for a line of credit, DON’T immediately apply for another one – this will have a long-lasting negative effect on your credit report.

If you still have questions about your credit score and coronavirus, put your question on our Messageboards and we will answer them asap!

Discover more about credit scores

If you’re worried about your credit report taking a turn for the worse, don’t panic! There are things you can do to avoid a score nosedive – and ways to apply for new credit even without a tip-top score.

Ask a question on our messageboard

If credit scores have you confused – or you want to know anything else money-related – visit the new messageboard. Get involved in the conversation and you could win a £25 Amazon voucher, too!

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Tom
Tom
5 months ago

Once again, some great information on here.

Joanne
Joanne
6 months ago

Very informative article.

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