Forbearance Agreement and Credit Reporting: What You Need to Know

A forbearance agreement is a payment arrangement made between a borrower and a lender to temporarily suspend or reduce loan payments. This agreement is usually made when the borrower experiences financial hardship, such as losing their job, illness, or a natural disaster.

While a forbearance agreement can provide temporary relief, it can also have an impact on your credit score and credit report. Here`s what you need to know about a forbearance agreement and credit reporting:

What is a forbearance agreement?

A forbearance agreement is a temporary agreement between a borrower and a lender to reduce or suspend loan payments. This is typically done when the borrower is experiencing financial hardship and cannot make their regular loan payments. It is important to note that a forbearance agreement is not loan forgiveness, and interest will continue to accrue during the forbearance period.

How does a forbearance agreement affect your credit score?

When a borrower enters into a forbearance agreement, it can have an impact on their credit score. If the borrower was previously making their loan payments on time, their credit score may decrease slightly due to missed or reduced payments. However, the impact on their credit score is typically temporary and can be mitigated by resuming regular payments once the forbearance period ends.

It is also important to note that a forbearance agreement itself does not appear on the borrower`s credit report. However, the missed or reduced payments that occur during the forbearance period will be reported to the credit bureaus.

How long does a forbearance agreement stay on your credit report?

Any missed or reduced payments that occur during a forbearance agreement will stay on the borrower`s credit report for up to seven years. This can impact the borrower`s ability to obtain credit in the future, as lenders may view them as a higher-risk borrower.

Can you avoid the negative impact of a forbearance agreement on your credit score?

While a forbearance agreement can have a negative impact on your credit score, there are steps you can take to minimize the impact. These include:

1. Communicate with your lender: If you are experiencing financial hardship, it is important to communicate with your lender as soon as possible. They may be willing to work with you to come up with a payment arrangement that does not involve a forbearance agreement.

2. Resume regular payments as soon as possible: Once the forbearance period ends, make sure to resume your regular loan payments as soon as possible. This can help mitigate the impact on your credit score.

3. Monitor your credit report: It`s important to regularly monitor your credit report to ensure that any missed or reduced payments are accurately reported. If there are errors on your credit report, you can dispute them with the credit bureaus.

In conclusion, a forbearance agreement can provide temporary relief for borrowers experiencing financial hardship. However, it can also have a negative impact on their credit score and credit report. By communicating with their lender and taking steps to resume regular payments as soon as possible, borrowers can minimize the impact on their credit score.