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Should you take a payment holiday?

Not sure whether to freeze your payments? This article should help you understand the impact of a payment holiday on your finances so you can make an informed decision.

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This article was originally published in June 2020. Updated November 2020.

It has been announced that the government’s mortgage and credit card payment freeze plan has been extended to six months for those who have not yet applied for one. If you have already taken out a payment holiday on a mortgage, you can get an extension up to a six month limit.

While this might be good news if you’re struggling with your finances, this isn’t the time to take advantage of a ‘free’ payment holiday if you don’t really need it. The reason being that this option isn’t actually free, as you’ll end up paying more interest in the long run.

Not sure whether to freeze your payments? This article should help you understand the impact of a payment holiday on your finances so you can make an informed decision.

How payment holidays work

The government initially proposed payment freezes back in April, as the negative effects of coronavirus began to take their toll on consumers.

Now, it’s been agreed that if you have a credit cards car finance plan, personal loan or pawned goods, you can defer repayments for another six months. Mortgage payment holidays have also been extended by six months, with a top-up to six months if you have already taken out a holiday.

Once the payment holiday period is over, you’ll need to repay your debt along with any interest that’s been accrued. (If you’re still unable to make your repayments at the end of the ‘holiday’, the FCA has asked lenders to support people by reducing their credit card and loan payments for a further three months.)

Are you struggling to make ends meet? Take a look at the range of support on offer, from mortgage holidays to discounts for key workers, in the ClearScore COVID-19 hub.

Can I apply for one?

Anyone who’s struggling to manage their finances due to coronavirus can apply to freeze their credit card payments. Although, banks may be stricter following the extension in who qualifies for a payment deferral.

If you’ve got other types of credit agreement, such as a payday loan or rent-to-own agreement, you can find more about the financial support available to you on the FCA website.

Will it affect my credit score?

The FCA has made it clear that if you choose to freeze your payments during the period of April to October 2020, your credit score and report won’t be affected for the duration of the payment holiday.

The UK’s three credit reference agencies - Equifax, Experian and TransUnion - have agreed to freeze people’s credit scores when they halt their payments with their lender, however this may change with payment holidays taken out from October as the FCA, Credit Reference Agencies (CRAs) and lenders respond to the government's latest announcements.

Remember that while lenders won’t be able to tell from your credit report if you’ve deferred your payments, there are other ways they can check. For example, they might ask you for a copy of your bank statement if you apply for credit through them.

At ClearScore we show you your Equifax credit score. Check yours now - it’s the first step to taking control of your finances.

Should I freeze my payments?

If you can’t afford to make your payments right now (maybe you’ve lost your job due to coronavirus) freezing your payments might offer you a bit of respite from your money worries.

But don’t forget - although your payments are frozen, the interest you owe won’t be. This could end up having a significant impact on the amount you need to pay back once payment holidays are over.

Before you make a decision, make sure you:

  • Think carefully about the impact it could have on your finances in the future.
  • Only freeze your payments if you need urgent, temporary financial help.
  • Continue to pay as much of your bill as you can afford to, even if it’s less than the minimum repayment.

Christopher Woolard, the FCA’s interim CEO, has advised "where consumers can afford to make payments, it is in their best long-term interest to do so, but for those who need help, it will be there.”

If you decide that freezing your payments is the best option, it’s important that you agree this with your lender before you stop paying. Missing payments and cancelling direct debits before you’ve agreed a plan with your credit provider is likely to damage your credit score, making it harder for you to access credit down the line.

To arrange a payment freeze, you’ll need to get in touch with your lender directly. Bear in mind that phone lines are likely to be extremely busy during this period, so if you can contact them online you might get the help you need faster.

Ultimately, if you can afford to keep repaying your balance, you should continue to do so.

If money worries are keeping you up at night, there are organisations who can help. StepChange offer free, expert debt advice - it’s completely confidential and all online, so don’t suffer in silence.


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