What is financial hardship and how does it impact your credit score?

Going through financial challenges can be a stressful time in your life. Whether it’s the result of a job loss, relationship breakdown, or rapid interest rate rises, understanding your options can help you work through this phase while protecting your long-term financial health. In this article, we’ll delve into financial hardship, the different arrangements available, and how it may impact your credit score.

What is financial hardship?

You might be experiencing financial hardship if you’re struggling to keep up with your bills and debt or loan repayments. This can happen after an unexpected change in circumstances or events, such as:

• Job loss
• Reduction in employment hours
• Relationship breakdown
• Death in the family
• Injury or illness
• Emergency event or natural disaster

These events can affect your income level and may also come with significant expenses, impacting your ability to meet your financial obligations. Depending on the reasons for your financial hardship, it may be some time before you can turn around your financial situation. So, what are your options, and how do they impact your credit report and long-term financial health?

Missed payments and your credit report

When experiencing financial hardship, some people may choose to miss repayments, hoping to make this up later. Unfortunately, this can have long-term consequences on your credit score:

• Repayment history information stays on your credit report for two years, so any late or missed payments will impact your credit score. This information is displayed as a number that shows how many days the payment was overdue in a particular month.
• Late payments are payments made between 14 and 60 days past the due date and will be recorded in your credit report.
• While one late payment is unlikely to have a significant impact on your credit score, several late payments could suggest you’re in financial stress and may negatively impact your credit score
• Missed payments of more than $150 can become a default after 60 days. If the missed payment becomes a default, this will be recorded in your credit report and will significantly impact your credit score.
• The default will include details such as the amount you owe and any accrued interest or fees minus any additional payments you have made.
• Defaults stay on your credit report for five years, with the record remaining even after you paid the default.

A default will stay on your credit report for five years, regardless of when you repaid that debt.

Do missed payments affect my credit score?

Your repayment history contributes to your Equifax credit score, so any missed payments will impact your credit score. While a late payment will have some impact on your credit score, a default will have a more significant impact.

Want to know what influences your credit score? Learn more about what goes into your credit profile.

Financial hardship arrangements and your credit report

Another option when experiencing financial hardship is to contact your lender or credit provider before you miss any payments. As they don’t want you to default, many are open to making financial hardship arrangements while you get back on your financial feet.

A financial hardship arrangement is an agreement that can include measures such as:

• Postponing repayments
• Reducing repayments
• Reducing interest rates
• Freeze interest rate charges
• Extend the term of the loan

A financial hardship arrangement may be recorded on your credit report.

Does a financial hardship arrangement affect my credit score?

No, credit reporting bodies do not use financial hardship information to calculate your score.

A financial hardship mark in your credit report will be removed one year after the final repayment is made or one year after the payment arrangement starts (depending on the arrangement).

How financial hardship appears on your credit report

Any financial hardship information (FHI) will appear in several sections of your credit report, including credit overview, account repayment history, and overdue accounts.

A temporary financial hardship arrangement appears as an ‘A’ against each repayment during the arrangement period. One year after the arrangement’s final repayment, all signs showing the arrangement will be removed.

A permanent financial hardship arrangement appears as a ‘V’ against the repayment when the arrangement started. One year after the arrangement begins, the sign will be removed.

When you have a financial hardship arrangement in place for any of your existing loans or credit, the status of that arrangement for that loan or credit will be visible as part of your credit profile. However, a credit report doesn’t show the reasons for entering a financial hardship arrangement or the details of the arrangement.

Talk to your lender or credit provider first

Asking for assistance can help you get back on track faster. Equifax data shows that up to 88% of accounts requiring financial assistance resolved their situation and returned to normal repayment or had some form of restructure. So if you’re experiencing financial difficulties, reach out to your lender or credit provider.