Answer to a question from a reader

How do payment holidays influence your credit score?

The short answer

It should not negatively affect your credit score

The whole question

How do payment holidays (debt review) influence your credit score? And what are the pros and cons of taking a payment holiday?

The long answer

Taking an agreed payment holiday should not negatively affect your credit score, if the lender supplies the correct information to the credit bureau, identifying the payment holidays against specific accounts. If the lender fails to communicate the details correctly, it could be flagged as non-payment on your credit report, which would make it harder to get credit in future.

The Credit Bureau Association is working with banks in this period to make sure that correct information about payment holidays is reflected in credit reports so that consumers are not described as being in default. It may be worth checking with the lender exactly how the payment holiday will be recorded on your credit record, before applying for a payment holiday.

All credit bureaux are allowing consumers free access to their credit reports during this time.

As to the pros and cons of taking a payment holiday:

The basic idea of the payment holiday is to help a consumer not to fall behind with payments. So it helps in the short term, but in the long term you end up paying more. This is because lenders generally continue to charge interest and fees on your accounts, making your repayment term longer and the balance higher.

The CEO of African Bank, Basani Maluleke, gives this example in an IOL Personal Finances article:

“...If you have taken out a R10 000 loan over 36 months at 28% interest and you need to take a one month payment break, you need to understand that it will extend the repayment term from 36 to 39 months. Your monthly instalment of R606.19 remains the same. However, your total cost of credit will increase. At the end of the extended term, you will end up paying R23 035.15 instead of R21 822.78.”

So applying for a payment holiday is not a decision to be taken lightly, but it may be your best option if you are in danger of defaulting on your loan/s. 

Answered on May 25, 2020, 10:23 a.m.

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