If you have ever been faced with an unexpected financial hardship that left you wondering how you’re going to pay your credit card bill—among other things—you are not alone. Most recently, many Americans have found themselves in a tricky situation due to the ongoing COVID-19 pandemic, which left millions without work or steady income. Last year, credit card companies reacted to this swiftly by offering assistance programs, or forbearance, to cardholder’s affected by the coronavirus.
Many individuals learn what “credit card forbearance” is upon hearing those words from their credit card company. Forbearance programs temporarily provide relief during financial hardship, whether that’s an adjustment to your monthly payment or reduced interest rates.
If you’re feeling the pressure to keep up with bills in this time of uncertainty, you may be considering putting your credit card balance into forbearance to ease the burden of a monthly payment. Here’s what you should know about the pros and cons of credit card forbearance before putting your payments on hold.
What is credit card forbearance?
Credit card forbearance is a method of debt management offered by credit card issuers to aid cardholders in times of financial strain. Credit card forbearance is frequently negotiated in times of crisis or natural disaster.
Credit card forbearance can come in many forms including credit line extensions, deferred payments for a set period of time, reduced interest rates and elimination of fees. The type of forbearance you may qualify for in a time of fiscal hardship depends on your personal finances and the card issuer’s policy.
It’s important to understand that credit card forbearance is not debt forgiveness, but rather a form of temporary financial relief. Credit card forbearance doesn’t forgive or waive any of your debt, only the fees and interest associated with your debt. For example, if your credit card issuer defers your payment for a predetermined period of time, you will eventually have a payment once that period of forbearance is over. It doesn’t simply go away.
Pros of credit card forbearance
When faced with unexpected financial hardship, you may not be prepared for all the bills that come your way, even if you saved and planned ahead. In times of extreme stress—where even putting food on the table or paying rent is hard—it’s understandable that paying your credit card bill won’t be priority number one.
Situations such as these are prime examples of why credit card forbearance is offered. The benefits of forbearance are straightforward in that it temporarily halts the burden of paying your credit card balance, allowing you to devote your resources to your immediate needs during a time of hardship. Additionally, credit card forbearance could free up money for you to put towards other debts such as an auto loan or mortgage. If you happen to find yourself in a situation where you have reduced income, reducing that monthly payment can help minimize your load.
Cons of credit card forbearance
Forbearance may seem like an ideal option when facing mounting bills and stress during uncertain financial times, but it’s a bit like putting a Band-Aid on a bullet hole. It may help for a short time, but the wound (or in this case debt) will still be there when you take the bandage off.
Because the terms and conditions centered around credit card forbearance vary based on issuer, some individuals who put their credit card balance in forbearance may be worse off after the relief period than they were before.
This can be seen in situations where a balance was placed in forbearance by reducing monthly payments rather than pausing them altogether. Though lowering the monthly minimum payment may sound great to an individual who is struggling financially, they will actually be paying more in the end due to added interest.
Additionally, forbearance can cause a bigger hole if you are not financially disciplined. For example, if your credit card issuer increases your credit limit and you continue to use your credit card without the means to pay off your balance at the end of the month, you will be putting more debt in your pocket. But not just more debt, more debt you weren’t able to pay off the first time around.
Forbearance can cause some bad habits if you don’t plan accordingly. While it may be a good option as a last resort, it is important to consider all of the benefits and risks associated with longer repayment periods, reduced monthly payments or increased credit limits.
Keep in mind, if your credit card issuer extends a longer repayment period to you, you will be paying more interest over time because your debt is being stretched, not minimized. Your principal balance isn’t changing, it’s simply being pulled into smaller pieces month-to-month.
How credit card forbearance impacts your credit score
Forbearance as a concept will not impact your credit score in any way. As long as you make on-time payments and you continue to follow the terms of the forbearance program established by your credit card issuer, your credit score will not be negatively impacted. However, if a higher credit limit causes you to max out your credit card, your credit score will likely go down because your credit utilization will go up. This is the case with any credit line increase, whether due to forbearance or not. You always want to keep the amount you owe in relation to your lines of credit under 30 percent.
How is forbearance different from deferment?
The term forbearance and deferment are often used synonymously, but there are a few key differences you should be aware of. A deferment of payments is not the same as forbearance, and generally a true “deferment” applies to student loans rather than credit card balances.
If your credit card issuer allows you to defer payment, in almost all cases the interest during the deferment period will still be compounding. (If you want to defer the interest itself, you can make payments within the 0 percent APR period offered by balance transfer cards.) Conversely, if your credit card balance is put into forbearance, fees associated with the balance could be temporarily suspended—though this depends on the issuer and in most cases interest will still accrue.
Another important difference between deferment and forbearance is the duration of the time in which payment collection is halted. In the case of credit card deferment, payment collection is typically suspended for a short period of time (usually one month or less) and repayment in full is expected as soon as the grace period ends. In the case of forbearance, the time period in which relief assistance methods may last is longer—in some cases several months.
The bottom line
In a turbulent and unpredictable economy, cutting back on expenses is a top priority for most Americans. For individuals who have lost their jobs due to the coronavirus, or small businesses just trying to stay afloat, credit card forbearance may be a temporary lifeline to keep their heads above water. But, it’s not your only option.
If you’re experiencing financial struggles, reach out to your credit card issuer to see how they can help you during times of financial hardship.