If you've ever struggled to pay your credit card bills on time, your card issuer may have told you about the option to enroll in a forbearance program.
Many card issuers offer forbearance programs, which act as temporary relief during financial hardships. Every forbearance program is different, but you can typically expect to receive assistance with monthly payments and maybe other benefits like lowered interest.
Forbearance programs have recently become popular due to the ongoing coronavirus pandemic that has left millions of Americans out of work or with reduced income. Credit card issuers are offering numerous relief programs, from waiving late fees to allowing cardholders to pause monthly payments.
But before you opt in to a forbearance program, you'll want to consider the benefits and drawbacks. While credit card forbearance offers short-term relief, it may increase your debt in the long-term.
Below, CNBC Select reviews the pros and cons of credit card forbearance so you can decide the best route to take during financial strain.
What is credit card forbearance?
Credit card forbearance programs are provided by card issuers to offer consumers facing financial hardship, such as recent job layoff, reduction in working hours or furlough, temporary relief.
Some common types of forbearance include:
- Pausing monthly bill payments
- Lowering or eliminating minimum payments
- Waiving late fees
- Lowering interest rates
The exact type of relief you receive from a forbearance program varies by a number of factors, such as your credit card issuer, the kind of credit card you have, your relationship with your card issuer (such as debt and payment history) and the details of your current financial situation.
If you and a friend each had the same exact credit card and both applied for forbearance, the kind of options you would receive would likely be quite different.
Pros of credit card forbearance
When you face a reduction in household income, whether because you have lost your job or your significant other has lost theirs, you can find temporary relief in credit card forbearance programs.
In this case, forbearance would offer a short-term benefit that would let you pause your credit card payments long enough to cover other bills or save money while you look for a new job. That may be toward your mortgage, auto loan or electric bills that take precedence over credit card payments until you have a predictable source of income again.
Many forbearance programs are currently offering the ability to pause payments without late fees, which can save you up to $40. And as long as you are enrolled in forbearance, your credit score won't be negatively affected by late payments.
Yet, it's important to remember that interest is not always waived along with your minimum payments. If your balance continues to incur interest charges, you may be shocked when you see how much your balance goes up during your time in forbearance. Increasing your total debt may also hurt your credit score, which we discuss next.
Cons of credit card forbearance
Forbearance may seem like a good safety net if you can't make at least the minimum payment on your credit card bill, but you should take into consideration any interest charges. If your card issuer allows you to skip monthly payments or pay a lower minimum payment with no late fees, you'll likely still accrue interest on your unpaid balances.
Those interest charges will be added to your existing balance and may cause you to fall into debt. This can result in a higher credit utilization rate (which is the percentage of your total credit you're using) and can lower your credit score.
An alternative to forbearance is to use a0% APR cardin order to avoid interest fees during the introductory interest-free period. For instance, the American Express Cash Magnet® Card offers an intro 0% APR on purchases for 15 months from account opening (then 19.24% - 29.99% variable APR). (See rates and fees.) If your credit score is good enough to qualify for this option, and you can verify some kind of incomeon a new credit card application (whether that be retirement distributions or a spouse's income), using a credit card with a promotional financing period can be a way to protect your score and buy some much-needed time without incurring extra debt.
Bottom line
If you have any doubt that you will be able to make credit card payments, it's in your best interest to contact your card issuer as soon as possible to discuss relief options. It's better to opt in to a forbearance program than toaccidentally miss a payment and incur up to a $40 fee and penalty APR. Once you're in a better financial standing, you can work on paying down your credit card debt, but until then forbearance can be a helpful safety net.
However, if you currently have the ability to make at least the minimum payment, you should consider sticking with that option since forbearance is not without some drawbacks.
Learn more: How to delay your credit card payment during the coronavirus pandemic
For rates and fees ofthe American Express Cash Magnet® Card, click here.
Information about the American Express Cash Magnet® Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Credit card forbearance programs are provided by card issuers to offer consumers facing financial hardship, such as recent job layoff, reduction in working hours or furlough, temporary relief. Some common types of forbearance include: Pausing monthly bill payments. Lowering or eliminating minimum payments.
Is a forbearance bad for your credit? ›
Forbearance itself doesn't have a direct impact on your credit score, as long as you keep up with your payments as agreed (i.e., making reduced minimum payments or resuming regular payments once forbearance is over).
What are the benefits of forbearance? ›
Forbearance also means that you can avoid foreclosure for your inability to pay missed loan repayments so that you can prevent your personal assets from being seized by your lender during the period for payment relief. It also allows you to pay more critical expenses, such as rent, utilities, or medical fees.
Does credit card hardship hurt your credit? ›
Disadvantages of a credit card hardship program
On the other hand, being in a credit card hardship program may have a temporary negative impact on your credit scores, as participation in these types of programs — as well as any missed payments —can still be reported to the three credit bureaus.
Can I skip a month of credit card payment? ›
To keep your credit card account open and in good standing, you must pay at least the minimum payment amount indicated on your bill by the due date. Failing to do so can result in late fees, potential damage to your credit score and even having your account closed and turned over to collections.
What is the disadvantage of forbearance? ›
Some of the disadvantages of forbearance include: In many forbearance scenarios, interest will continue to accrue on the loan during the forbearance period, which means that the borrower will end up owing more money when they eventually have to start making payments again.
Do credit card companies give forbearance? ›
Many card issuers offer forbearance programs, which act as temporary relief during financial hardships. Every forbearance program is different, but you can typically expect to receive assistance with monthly payments and maybe other benefits like lowered interest.
Do you have to pay back forbearance? ›
Homeowners who receive a forbearance plan are not required to pay back the amount they owe all at once unless they are able to so. Each homeowner is facing a unique financial situation, and there are a variety of options to resolve the missed amount.
How long does forbearance stay on a credit report? ›
KEY TAKEAWAYS. Mortgage forbearance may affect your ability to obtain a new mortgage loan or refinance your existing one, depending on your unique circ*mstances and loan type. Forbearance is always better than a foreclosure because missed payments stay on your credit report for only three years versus seven.
What are the two types of forbearance? ›
Find links to the forms under the forbearance types listed below. There are two main categories of forbearance: general and mandatory.
The only way credit card companies are likely to forgive the full amount of your balances is if you file bankruptcy. However, there are other ways to get out of debt in a reasonable amount of time. For example, you may be able to have a portion of your credit card balances forgiven with a debt settlement program.
How do I get out of credit card debt without paying? ›
No, you really can't get rid of credit card debt without paying. Filing bankruptcy for credit card debt will indeed lets you escape credit card debt. But if you're asking, “How can I get rid of credit card debt without paying anything to anybody?” the answer is still: You can't! Well, you could if you dropped dead.
Can credit card debt take your house? ›
If you owe money for most other debts like credit cards and medical bills, you (usually) did not sign a security agreement. So, the creditors cannot seize your home to pay the debt. But, if you want to sell your home and creditors have filed judgments for unpaid debts, you may need to pay those debts before the sale.
What to do if you can't afford credit card payments? ›
For more, here are the best credit cards for paying off debt.
- Call your credit card company and explain your situation. ...
- Try credit counseling or a debt management program. ...
- Rework your budget and find places to save or earn more. ...
- Transfer your balances to a 0% intro APR credit card.
Consequences for missed credit card payments can vary depending on the card issuer. But generally, if you don't pay your credit card bill, you can expect that your credit scores will suffer, you'll incur charges such as late fees and a higher penalty interest rate, and your account may be closed.
How to stop paying credit cards legally? ›
If you want to know how to stop paying credit cards legally, that could be tackled with debt settlement programs or filing for bankruptcy. Some of these options can help you get much-needed temporary financial relief. Still, there are drawbacks to consider, including the risk of being sued or selling assets.
How long does forbearance stay on credit? ›
KEY TAKEAWAYS. Mortgage forbearance may affect your ability to obtain a new mortgage loan or refinance your existing one, depending on your unique circ*mstances and loan type. Forbearance is always better than a foreclosure because missed payments stay on your credit report for only three years versus seven.
Will forbearance affect getting a mortgage? ›
Forbearance has a major effect on your ability to refinance. The exact effects depend on the type of loan you're looking at in your refinance. First, as detailed above, loans from Fannie Mae and Freddie Mac can only be refinanced during a forbearance if you continue to make all your payments.
Is it better to get a deferment or forbearance? ›
editorial guidelines here . Student loan deferment and forbearance can both postpone your payments, offering immediate financial relief without jeopardizing your account. Deferment also typically pauses your interest, making it a better choice than forbearance.
