Payment holiday pros and cons explained - and if it affects your credit file
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This week I have been flooded with your messages about finance and payment holidays, after I spoke to Gloria Hunniford about the subject on Rip Off Britain Live. So what is a payment holiday? How do they work? And are there any catches? Here’s my guide.
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What is a payment holiday?
A payment holiday traditionally refers to a set period of time where a lender or credit firm agrees you don’t have to repay money you borrowed. You don’t get a discount and the debt doesn’t get reduced. The outstanding money that you haven’t paid during the "holiday" period gets tagged on the end of the loan or credit period and because it’s taking a little longer to pay the full debt back, you’ll pay more interest ultimately.
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What products do payment holidays cover?
Payment holidays were introduced originally for financial products. In theory, you can get a payment holiday on pretty much any form of borrowing, from bank loans to credit cards. You could, theoretically, ask a buy now, pay later company for one too, even though interest-free borrowing isn’t regulated just yet.
There are no legal or regulatory obligations on businesses to give you a payment holiday, though if you are struggling financially, the lender is obliged to come up with a range of potential options for you to help you keep on top of the money you owe. Failure to do so can have repercussions for them too if they make your situation worse.
In recent years, payment holidays have crept in to other sectors too, where there is a regulatory obligation on businesses to help people who are finding it hard to pay the bills. Again, in theory, you could ask for a payment holiday with an energy, water, broadband or other utility agreement or another ongoing contract. In practice, you might be offered other alternatives to help you get through a tricky financial period.
To my intense disappointment, the sector that is the most unhelpful when it comes to debts and outstanding bills is… council tax. Shop a nasty council to you MP and focus on other bills if you are finding it hard to keep on top of things.
What are the advantages and disadvantages of payment holidays?
Payment holidays are a great, short-term solution to buy yourself a bit of breathing space if you’ve been hit with an unexpected bill (like having to replace a car or washing machine) or a life changing event like losing a job and hunting for a new one.
The disadvantage is there is no law that says a business MUST give you one, so there’s a vast amount of inconsistency in how they are offered and for how long. Not only with different financial products, but with different businesses too. In fact, sometimes it can even come down to the member of staff you speak to on the telephone.
And of course, by pushing the money you owe to the end of the loan or credit, then you pay more in interest over the course of the agreement.
How long do payment holidays last?
Mortgage payment holidays tend to be three months, though there is sometimes the option to add on another three sometimes, depending on the circumstances.
Other payment holidays depend on the lender. Over the pandemic, short term, high-cost credit lenders were told to give people a month's payment holiday by the regulator, the FCA. But payment holidays are at the lender’s discretion. The rules – such as they are – say payment holidays are one of a range of options lenders must consider when helping someone in financial difficulties but they don’t force them to offer the holidays. Here's what the FCA says.
How many payment holidays can I ask for?
As a general rule, only one. Well, a lender may consider more but with quite a bit of time in between holidays. With mortgages, you may be offered one three-month period first, then potentially another three months. But if it’s clear you can’t afford your mortgage, then other options may be required, from extending the term to selling up and downsizing.
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With all loans and credit, repeated payment holidays are unlikely to be granted. This suggests a wider problem to the lender and that other forms of help might need to be offered, or the account could be passed to their debt management services.
Is there a fee for a payment holiday?
You should not have to pay for a payment holiday as this is tool to help people who are trying to get out of debt. Never pay money to get out of financial difficulties, particularly to a debt management company.
How do you qualify for a payment holiday?
Eligibility criteria are usually assessed on a case-by-case basis. In the past, some people might have opted to take a mortgage payment holiday as a lifestyle choice, for example, if they wanted to use the money to do up the kitchen. But these days, it’s mostly when people are in financial difficulties.
A financial organisation will usually ask for you to complete a basic budget and then they will assess the level of help you need. I covered how to do this in my recent article on money and mental health. There is an industry standard for assessing financial difficulties and you can find out more (and get help) from free debt charity StepChange.
Will it affect your credit rating?
Over the pandemic, it was agreed that credit files should not be affected by payment holidays. But that guidance has since expired. In theory, a lender does not have to put a "mark" on your credit file to say you’ve missed a payment.
But if they may automatically mark the loan or credit payments as "missed" on the file – even if it’s down to a payment holiday. Other lenders might actively chose to show that you have not made a payment as an "accurate" reflection on how you are honouring your contract. This could have an impact on any future borrowing. So you should always ask the lender if the payment holiday will affect your credit file – and if they say it won't, get them to confirm this in writing.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist
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