Your credit score is important for reasons well beyond simply getting credit. Qualifying for the apartment you want, getting good insurance rates, and even getting hired for a job can depend on having good credit. It's therefore critical to know whether decisions like choosing to defer a loan payment will affect your credit score. Below, we'll take a look at what goes into your credit score and how a deferral can affect it.
The basics of credit scores
In order to determine your FICO credit score, Fair Isaac looks at five factors:
- Whether you've been timely on past payments
- How much you owe
- How long you've had loans or credit cards outstanding
- Your mix of different types of credit
- How much new credit you've asked for recently
Of these, paying on time is the most important, making up 35% of your credit score. A few late payments won't necessarily hurt your score a lot, but having a regular history of missing payments will generate a lower score than someone who never pays late.
Why deferrals generally aren't a problem
The key to understanding how your credit score changes with missed payments is that, when you don't make a payment on time, you're violating the terms of your loan. When you do so, your lender will report the violation to credit agencies, which, in turn, adjust your score downward.
When you get a deferral, you typically aren't violating the terms of your loan. In some cases, the loan specifically provides for deferrals, so there's no violation at all. In other cases, your lender might agree to a deferral after consulting with you, and even if you might technically have broken the loan's terms, the lender's agreement to accept a deferral indicates a modification of the terms.
As a result, the only way a deferral affects your credit score is by keeping the amount of your outstanding loans higher than it would be if you paid them off more quickly. That's relatively inconsequential compared to the negative impact of actually missing a scheduled payment. Don't let worries about your credit score keep you from taking advantage of deferral terms in your loan.
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