What happens to your credit score when you take up a lender’s offer to defer a debt payment?
The question has been nagging Canadians pondering the opportunity to postpone payments on their mortgage, credit cards, auto loans and bills amid the COVID-19 pandemic.
Canada’s big six banks and a variety of other lenders and utility providers have announced programs that would allow customers to defer up to several months’ worth of payments if they are facing financial hardship because of the health emergency.
Often these options come with the guarantee that lenders will not report deferrals as missed or late payments, which would negatively affect a customer’s credit rating.
Normally, if that’s the case, a lender reporting the deferred payment as late would be a mistake, says Julie Kuzmic, director of consumer advocacy at Equifax.
That’s something consumers would be able to dispute, as with any other error on their credit report, according to Kuzmic.
Some mortgages, for example, include “flexible payment” options that allow borrowers to skip a payment — usually once a year — without repercussions for their credit score.
These, however, are not normal times, Kuzmic adds.
What credit bureaus have heard from a few of the entities that report to them — which include banks, other types of lenders as well as telecom companies — are not currently set up to be able to not report deferred payments, according to Kuzmic.
“The way their systems work today is if somebody is late on a payment, then … that’s what’s going to get sent to us.”
The financial industry, as well as federal and provincial regulators, are currently at work to come up with a system that would ensure borrowers are not penalized for taking advantage of special payment arrangements, Kuzmic says.
“We understand that people are concerned about how deferred payments and other special arrangements may affect credit scores. We are working together as an industry to help minimize any negative impact on credit standing while maintaining the data integrity that underpins our ecosystem,” Equifax said in a statement emailed to Global News.
“The specific details continue to evolve and we will share more information as the plans are finalized,” Equifax also said.
TransUnion, the other major credit bureau in Canada, told Global News in a statement it has “provided guidance to lenders on how to report deferrals.”
“While many factors influence a single score, our analysis indicates that participation in deferral programs will neutralize the impact to TransUnion scores,” the company said. “We continue to work closely with the wider industry with the intention of achieving the best outcome for consumers and preserving the integrity of credit reporting for the Canadian economy.”
For the time being, consumers’ best defence is to ensure they have a commitment in writing that lenders will not report deferred payments, says Scott Terrio, a certified credit counsellor at Ontario-based Hoyes Michalos.
“Always get it in writing. Don’t go with what somebody tells you on the phone.”
That’s because you’ll need written proof of the lender’s commitment, should you need to dispute a deferred payment being mistakenly recorded on your credit report, Terrio says.
It’s also important to keep an eye on your credit report to ensure there are no errors.
Normally, consumers can ask for a free copy of their credit report from each credit bureau by mail. Experts generally advise checking your credit report on a regular basis and asking for copies from both major credit bureaus, as they may have different information about you on file.
Amid the COVID-19 emergency, however, Equifax is currently offering Canadians the ability to access their credit report online for free.
The online reports will give Canadians an up-to-date snapshot of their credit history but do not include records of monthly payments and account balances going back up to 25 months, information that is included in the paper reports, according to the Equifax website.
Canadians should also be aware that if they get their report online, their data will go through the U.S., something that doesn’t happen with paper reports, Kuzmic says.
Lenders use your credit report to decide whether and how much to lend to you, as well as what interest rate to charge you.
They may use their own formula to calculate a credit score based on your credit report information, instead of relying on the Equifax or TransUnion credit scores.
Terrio says consumers who try to dispute credit report errors may run into delays as tens of thousands of Canadians are applying for payment deferrals.
“None of the systems can cope,” he says.
But it’s good to keep in mind that, while addressing credit report errors is important, there’s no huge rush to do so if you’re not planning to apply for a new loan or credit in the near term.
Also, he says, it’s in lenders’ own interest that customers not be mistakenly penalized for taking advantage of special payment plans. Ultimately, he notes, lenders want to lend and low credit scores limit their ability to do so.
“The lender doesn’t want you to get dinged for this.”
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