Will A Payment Holiday Affect Your Credit Report?

Updated: March 17, 2024 Author:

Quick answer: A payment holiday will typically be placed on your credit report which in turn can reduce your credit score. Because a lower credit report score can reduce your borrowing options in the future, it is always best practice to discuss how the holiday will impact things with your lender when talking about the initial arrangement.  

    What is a payment holiday?

    A payment holiday is an agreed break in a repayment schedule that you have discussed in advance with your lender. If you face a potential cash flow restriction in the coming weeks or months, considering a payment holiday is a sensible course of action. The key point is that you have to discuss the duration and reason for your holiday in advance with your lender. 

    It is worth noting that no lender is legally obligated to give you a payment holiday, but that being proactive and open with your communication is always the best course of action. If in doubt, reach out at the earliest opportunity and have answers prepared in advance for the following: 

    • What are your reasons for wanting to request a payment holiday today?
    • What steps are you putting in place to improve your cash flow situation in the near future?
    • How long would you like your payment holiday to last?

    Thinking through these three key questions in detail will give you the perfect starting point when requesting a payment holiday. 

    What are the downsides of a payment holiday?

    If you are looking to improve your credit score over the long term, requesting a payment holiday will likely slow this process down. While you have not technically missed a payment because you have agreed the holiday with your lender in advance, you have failed to keep to the original repayment plan as agreed when you took out the credit line. That said, lenders will always look on payment holidays much more favourably than they will a series of missed payments with no prior communication. 

    During the course of your payment holiday you will not be liable to make repayments listed in your original agreement, but you will still incur interest on the total amount you owe. This means that while you can have a break that helps your cash flow to recover, the total amount you owe will grow. Unfortunately there is no getting around this and charging interest during a payment holiday is commonplace with all lenders. 

    Is a payment holiday always better than a late payment?

    Late payment markers are listed on your credit profile for 6 years and can have a significant impact on your credit score. This is because you have failed to adhere to the prior repayment agreement. A payment holiday is always your best option because it will put you in direct contact with the lender who will look to find a solution that works for both sides. While they are not duty bound to offer a holiday, they will offer something in a large number of cases. 

    Even if you worry that you won’t be granted a payment holiday, approaching your lender in a proactive, transparent manner is always better than struggling in silence. You may find that there are other courses of action open to you, many of which will not have the same damaging impact to your credit score as missing a payment all together. If in doubt, reach out and discuss your situation at the earliest opportunity before taking things from there. 

    Can you appeal against the denial of a payment holiday?

    Payment holidays are granted at the discretion of the lender and they are not legally obligated to give you one. If you feel that you have been unfairly treated, or that your financial situation is such that a payment holiday is your only viable option, you may consider: 

    • Restating your case with a higher level of detail to try to convince the lender of the full spectrum of your circumstances 
    • Approaching another lender for a payment holiday to see if they are more amenable to your situation 
    • Looking for ways to redirect a key portion of your cash flow that will allow you to gain some additional headroom 

    While none of the above are easy, the point is that there are always options at your disposal if you get rejected the first time. Of course, these types of situations can cause undue stress, which is why taking action at the earliest opportunity is always the best approach. If in doubt, reach out to your lender(s) as quickly as possible with a full account of your personal and financial circumstances. 

    How should you use your payment holiday?

    Having a payment holiday in place will come as welcome relief for what was a stressful financial situation, but to get the full benefit from it you need to use it wisely. While it can be tempting to switch off now that you have achieved the fresh injection of headroom needed, the solution to your problems actually lies a little further down the road. Here are a few key things that you can do during your payment holiday to put yourself back on a sound financial footing: 

    • Set up direct debits for any repayments and bills you have to make on a regular basis to make sure that everything comes out automatically each month 
    • Create a realistic household budget that allows you to see what you have coming in and going out at a glance so you can plan more effectively 
    • Factor in seasonal payments for things like holidays and putting the family car through its MOT so that you can spread your costs across the year 
    • Put a plan in place to increase your household income. This could be taking on extra shifts if you are in full-time employment, or looking for ways to expand your own business if you work for yourself

    Making the most of your payment holiday will reduce your stress levels and help you plan for the future in the most effective way.