deferring debt payments

How Does Deferring Debt Payments Amid Covid-19 Hurt Your Credit Score?

Have you ever gone to apply for a loan only to find that you’ve been denied because of a negative report on your credit score? What if this happened and it wasn’t your fault, but rather was due to an error by credit reporting agencies.

You might not think this is a common occurrence but is actually more frequent than you might think. With more Canadians deferring debt payments because of the Covid-19 pandemic, you should be aware of how these deferred payments are going to affect your credit score.

The Covid-19 pandemic has left millions of Canadians with unforeseen financial challenges. They are struggling to keep up with their bills, including but not limited to rent, utilities, monthly credit card payments, and mortgage payments. More Canadians than ever are currently experiencing temporary or permanent unemployment or have had their household income reduced due to a reduction in wages.

If you have experienced a pay cut during the Covid-19 pandemic, lenders and creditors are offering a multitude of debt repayment options. One of these choices may be to defer a payment which enables the borrower to delay or suspend loan payments for an agreed upon amount of time.

Deferring Debt Payments: What Happens When You Do This?

With these deferrals, the banks have often provided guarantees that they would not report the deferrals as missed or late payments to the credit bureaus. It would unfairly result in a negative effect on the customer’s credit rating.

However, despite the guarantee that they would not report the deferrals to the credit agencies, recently, a Global news report has shown that this is not the case. What is actually happening is the credit bureaus are reporting that these entities, including banks, telecom and numerous other companies, aren’t currently set up to be able to NOT report that a payment is being deferred.

What that means is their systems are not set up to report a deferred payment to the credit bureaus and are simply reporting these deferrals as either late or missed payments. This has resulted in a major negative effect to the credit reports of thousands of Canadians.

Although regulators are trying to come up with a solution to this issue, due to the complexity and limited resources available during the pandemic, it is likely that this will continue for the foreseeable future.

What Can You Do About It?

The best way to protect yourself is to actively monitor your credit reports. To help out during the pandemic both Equifax and TransUnion (the two major credit bureaus in Canada) are, for a limited time, offering free credit reports. If you notice missed payments on your credit reports that should’ve been reported as a deferred payment, contact the credit bureaus directly to dispute it.

The credit bureaus typically require evidence that a payment has been deferred and not missed. To protect yourself, it is always best to ensure that you have commitments in writing from your lender that the deferred payment will not be reported.

This may sound like a very simple task to complete in order to have your credit report corrected but due to the realities of the pandemic, it is not. It has been reported that due to the number of Canadians applying for payment deferrals, there has been numerous delays in trying to dispute credit reports.

It is advisable that while having a good credit score is important, there is no rush to complete your dispute in the short term if you are not planning on applying for a new loan or credit in the near future.

How Making Minimum Payments Each Month Affects Your Credit Score

For many individuals, deferring debt payments is only a temporary solution and regardless of how they are reported to the credit bureaus, they still suffer from bad or no credit. Many people often believe that their credit score is great because they are able to make the minimum monthly payments on their credit cards.

However, if you think your finances are under control because you’re keeping up with minimum monthly payments on credit card debt, think again. It is actually a debt warning sign. To become debt-free, you need to pay down more of your balances.

Every credit card is different, but a minimum payment is typically 3% of the outstanding balance, plus interest payments and fees for that month. While it may be tempting to just make the minimum payments on your credit card debt, it’s actually much more harmful in the long run.

Only part of the payment you make goes towards the actual principal. The rest goes to interest, so it takes a very long time to pay off your balance in full. In addition, carrying a balance also negatively impacts your credit utilization, which impacts your credit score, and may make it more difficult to borrow for something like a mortgage or a car loan.

Looking at Other Options

An option to reorganize your finances that has gained popularity across Canada is a Consumer Proposal. A Consumer Proposal offers a more affordable monthly repayment plan and lasts up to five years maximum, regardless of the amount you owe.  Typically, in our experience, the amount of the monthly payments is often lower than the minimum payments that are required by your lenders.

A Consumer Proposal will have an effect on your credit report. But on the upside, it will allow you to start building your savings, which can be used later for a down payment towards a house or a new car. Ask any lender and they will tell you that having a down payment can be the most important factor when obtaining a mortgage or a loan in the future.

To learn more about how a Consumer Proposal can help you, please contact our office for a free, no hassle, confidential consultation. One of our experienced team members will help you start a path to rebuilding your credit and having a debt-free life.

Len Hiquebran, CPA, CA, LIT

After completing my articling at a local accounting firm, I spent some time working in industry as a controller of a logging company. Subsequently, I joined Derek L. Chase & Associates Ltd. in 2017 and began working in the insolvency field. In June 2020 I completed my studies and was granted a license by the Federal Government to be a Licensed Insolvency Trustee.