The financial hardship that has impacted consumers during the Coronavirus pandemic could cause damage to your credit score, which might last 6 years.
The government’s Covid-19 financial support schemes will start drawing to a close in the spring. As this deadline approaches, UK lenders are set to start contacting hundreds of thousands of borrowers to enquire about their plans to repay money owed from payment holidays.
The consequence of this is that any consumer who has been plunged into financial difficulty by the Coronavirus pandemic that they have yet to resolve could see some significant damage to their credit score. The issues that appear on credit reports, like defaults and CCJs, can last as long as 6 years.
Read on to learn more about how credit scores could be affected and some steps you can take if you have late payments or defaults on your credit report.
What next for people who have relied on Covid-19 financial support?
When the Coronavirus outbreak began and the first lockdown measures were imposed, the UK Chancellor announced payment holidays to give homeowners a 3-month break on mortgage repayments. This was intended for people whose finances were negatively impacted by the lockdown measures that came as a consequence of Covid-19.
Since then, various insurance companies and other firms have come forward to provide alternative forms of support for those who have suffered as a result of this global crisis.
The deadline for applying for payment holidays in 31 March 2021, meaning that you must submit your application before then to get a short-term respite. After this deadline, lenders will begin to contact more than 300,000 people who have had to make use of payment holidays. They will begin discussing how those people intend to repay what is owed based on their personal circumstances.
The Furlough scheme, and the Self-Employed Income Support Scheme, are currently set to come to an end on 30 April 2021. At this point, there is a significant risk of many losing their jobs or at least suffering a loss of income. UK unemployment is already alarmingly high, and many fear losing their job at some point in the coming months. With the removal of the requirement for banks to provide a £500 overdraft for people experiencing hardship due to the virus, many have already taken a blow to their situation.
Financial support has its limits and, when it ends, thousands of people are likely to be financially impacted. This will lead to difficulties covering the repayments for payment deferrals, along with other credit. This will increase the chances of subsequent missed payments and defaults that will appear on credit reports. All this will result in credit scores taking a sizeable hit.
What does it mean if my credit score drops?
All lenders assess individual cases on their own merit, but the vast majority will add the amount owed from payment holidays onto a loan’s overall balance. They will then recalculate the borrower’s monthly repayments on that basis.
With many still suffering financially from the impacts of Covid-19, there is a greater risk of people finding themselves unable to make repayments. Unfortunately, any defaults or missed payments will come up on the credit reports of those unfortunate people, and they will remain for 6 years. This can cause credit scores to drop, and negative markings on a credit score are likely to discourage lenders from granting finance in the future.
If you wish to apply for a mortgage, loan, credit card or mobile phone contract, your credit report will be checked. If you have credit issues like defaults or missed payments on record, you will be judged as a high-risk borrower. This reduces your chances of being approved, or at least means you will be offered deals with higher interest rates.
With credit scores at risk for people whose financial situation has been impacted by the current situation, it is crucial to act now and get a picture of yours in order to stay on top of your finances.
What to do if you have missed payments or defaults on your credit report
There is hope that the 6-year impact won’t be applied to people whose finances have suffered due to the Coronavirus pandemic. This year has seen a unique, unprecedented situation for the entire world, so the world of finance may reassess to see what can be done to protect the public.
If you have missed payments or defaults on your credit file, you can get in touch with the different credit bureaus and ask to have a notice of correction added to your file. This will not remove the missed payments or defaults from your record, but it will provide you with a chance to explain mitigating circumstances that caused them, such as the Coronavirus.
To view your credit score and check whether any missed payments or defaults exist on your report, we recommend CheckMyFile a credit-checking website that covers the four major credit reference agencies in the UK for maximum detail in your report. It is easy to identify errors in your report and contact the appropriate agency to address mistakes or add corrections that show you have taken a financial hit from Covid-19.
You can sign up for free for 30 days and cancel at any time if you don’t want to pay the monthly fee after that initial period.