Forbearance programs provide financial assistance during times of hardship. Many banks and credit card issuers have forbearance programs for special circumstances, and most offer these programs in times of crisis such as the current coronavirus pandemic.
With so many people experiencing layoffs and cutbacks right now, accepting forbearance from your credit card issuer may seem like an obvious choice. But the financial relief may not come without a price. Let’s explore the pros and cons of credit card forbearance programs to help you determine the right path for your current situation.
What Are Credit Card Forbearance Programs?
Forbearance programs temporarily relieve some financial obligations on your credit card. The programs vary by provider and circumstance. They may include: waiving fees on your account, offering payment extensions, extending your line of credit, refunding interest for one or more billing cycles, or other measures.
Credit card forbearance is particularly common during large-scale crises, such as a natural disaster or a national financial hardship. Several credit card companies are currently offering forbearance programs for the COVID-19 outbreak, including American Express, Citi, Capital One and Discover.
Forbearance Is NOT Credit Forgiveness
Forbearance is not the same as credit forgiveness. No portion of your debt is forgiven or waived; only fees and interest associated with it. If your credit card provider allows you to skip a payment in forbearance, you will still need to eventually make that payment. Forbearance is simply a means of short-term relief.
Advantages of Forbearance Programs
The biggest advantage to accepting forbearance is that it frees up money during a time of need. If you are without a job due to a personal hardship, a single payment extension could make a big difference. If your income is temporarily reduced, having a lower minimum monthly payment could relieve your stress. Your total debt will remain the same, but you will not be penalized for making a lower monthly payment.
Another benefit to credit card forbearance is that it may free up money for other debts. If your mortgage lender does not offer forbearance, having reduced credit card payments may give you the boost you need to avoid foreclosure.
Drawbacks of Forbearance Programs
The short-term relief from forbearance may lead to long-term financial issues later on, especially if you are not financially disciplined. This is particularly true for increased credit limits. An increased credit limit may lead you to make more purchases. This will result in more debt that you’ll need to repay. If you are struggling now, who is to say you will be in a better situation later on? Not only does your principal balance increase, but so does the amount of interest you pay for the debt.
Forbearance also may encourage some bad money habits. Reduced monthly payments lead to a longer repayment period, resulting in more interest over time. Payment extensions may cause cardholders to prioritize non-necessities over debt repayment, simply because the option is available. If you are susceptible to poor financial choices, it may be best to forego forbearance.
Will Forbearance Impact My Credit Score?
Forbearance will not directly affect your credit score. As long as you uphold the terms of the relief program, your payments will be reported as on-time. However, the aftermath of forbearance could impact your credit score. If a higher credit card limit leads you to make more purchases, your credit score will likely be affected since your debt utilization will increase. This is one of the most important factors in your credit score. That is why it is important to review the terms in full before deciding if forbearance is right for you.
Should I Accept Forbearance on My Credit Card?
First, talk to your credit card provider about the forbearance programs available. If you have the option to get your interest or fees waived, that will work in your favor without adding to your debt. This is especially helpful in times of a crisis. If your only option is to delay payment or make a reduced monthly payment, consider how that will affect you in the long run. Be leery of accepting an increased line of credit if you cannot repay it in a reasonable time frame. Utilize the offers available if you are in need, but don’t let a short-term decision lead to long-term financial turmoil.