Will applying for financial hardship hurt my credit score?
I’m struggling to make my home loan repayments. I am so proud of how I have rebuilt my life after my marriage broke down, but my mortgage is up by $500 a month, and I’m really worried. I’ve used up my savings and I’m starting to panic about being able to make even the next repayment. Having worked so hard to get on my own feet, I don’t want to jeopardise that. I was late with one repayment by two weeks already. If I tell the bank I’m in trouble, will it affect my credit score? How can I get out of this? Belinda
Amid rising costs and inflationary pressures, there’s enormous pressure on peoples’ budgets.Credit: Dionne Gain
Belinda, yours is a predicament being replicated all over the country, with rents as well as mortgages applying dreadful pressure to peoples’ purse strings.
All carry the legacy of 425 basis points of interest rate rises in 2.5 years.
But I can allay your fears about your credit score now and into the (near-term) future… if you follow the below savvy and safe survival strategy.
First, know that you have 14 days’ grace to make any kind of credit repayment. Until you are later than this, it will not be reflected in your credit record and will not affect your credit score. So you have no problem there to date.
(Note that you have 60 days’ leeway before you’re marked late – the term is in “default” – with a regular non-credit bill such as your electricity.)
Let me explain the credit score protection you can access in the future.
It sounds as if it’s time to “fess up” to your providers that you’re now stretched too thin.
And as I say often, confessions are attracting concessions; your mortgage lender and all your other creditors, along with utilities providers, must have financial hardship departments, and they must extend you some leniency if you are in financial trouble.
I am assuming your mortgage is the largest of your monthly bills – it is for most people.
That means any kind of official concession you get here will make a big difference.
And here’s the thing: it will also do no damage to your credit score.
Post-COVID-19, entering into a financial hardship arrangement means that even if your repayments are reduced or entirely paused, each month you’ll be marked as paying on time. That’s important because, as I said, after 14 days’ delay in paying, your credit score would previously have been affected.
Now, it will simply be noted on your credit file that you are in a financial hardship arrangement.
This does not feed into your credit score itself, and it disappears after one year. A late payment of a credit bill would only drop off your file after a rolling two years. (Note that for non-credit bills, your file and score would be marred for five years.)
It sounds as if it’s time to “fess up” to your providers that you’re now stretched too thin.
Your lender may offer you something along these lines:
- A full repayment holiday for three months – good, but short, and you could find yourself back in the same situation pronto.
- A half-repayment holiday for six months – better because, yes, you can stretch it out for longer… and half payments might take off a lot of pressure.
- Interest-only – this could be very favourable for a time.
- An extension of your loan term – called re-amortisation. This would spread your borrowings over a fresh 25 or 30 years, and so probably dramatically reduce the amount of money you have to find each month. They may even offer you a lowered mortgage interest rate – unlikely, but you never know.
Any of these measures could be an effective stop-gap… and interest rates may even fall over their duration. You can only hope.
In case they don’t though, the other lever to pull is your income.
Are there smart ways you can add to it? Have you received all the pay rises you ought? Is it worth skilling up to leverage up? Is there a side hustle you could take on… something you love that could make you a lovely bit extra?
You just need that little bit more fat in your finances going forward to decrease your anxiety and increase your housing security.
Meanwhile, throughout the above strategy, Belinda, your credit score is safe.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.