What is a deferred payment and how does it affect your credit?

A recent report from the Federal Reserve Bank of New York showed that, as of the end of 2022, American credit card balances surged to a combined $986 billion, an increase of $61 billion over the previous quarter. That’s the most substantial quarterly increase in credit card debt nationally since the New York Fed began tracking this specific data in 1999.

With figures like these, it's no wonder people turn to financial products like debt consolidation loans and balance transfer cards in an effort to dig their way out of debt. According to ConsumerAffairs’ January 2023 survey of 1,070 American consumers:

• Over 50% of respondents reported that inflation and rising interest have made it more difficult to pay all their monthly bills.
• 9.4% reported being unable to pay all their monthly bills.
• 32.5% of those who need a personal loan need it to pay their bills.
• 18.7% of those who need a personal loan need it to consolidate high-interest debt.

If you're in any of the situations just described, deferred payments can help buy you some time. Even a few months of skipped payments can give you some breathing room in your finances, which you can use to turn your situation around.

Key insights

• If you're struggling to keep up with bills, deferred payments can help you get a handle on your finances.
• Don’t start skipping payments until you receive a written agreement of deferral from your lender.
• Formally deferring payments won’t affect your credit score.

What is a payment deferral?

With a payment deferral, you make an agreement with a lender that lets you stop making payments for a set period of time. While deferred payments are usually set up due to financial hardship, you can request payment deferral for any reason. Also, be aware that some payment deferral options are offered on an institutional basis, whereas others may be agreed upon by your lender only on a case-by-case basis.

Carlos Medina, senior vice president of operations and business development for One Technologies, which owns the credit monitoring product ScoreSense, pointed out that "buy now, pay later" (BNPL) offers are another type of deferred payment option to look for. With a BNPL promotion, a consumer can break up a purchase into gradual installment payments.

"Buy now, pay later is a short-term financing option that defers payments for purchases, giving consumers the opportunity to break payments into smaller, more manageable dollar amounts," said Medina.

It's not uncommon for major retailers to have BNPL promotions, and Medina pointed out that both Walmart and Amazon have this option for eligible purchases.

Some credit cards also offer a deferred payment plan that lets consumers skip interest payments and finance purchases over a set period of time with a specific fee structure instead. The American Express Plan It feature is a good example of this.

How deferred payments affect your credit

While some deferred payment options are for purchases you need to make, this guide is mostly intended to help you understand your options when you’re struggling to make payments on a loan you already have. This leads us to an important question: Will skipping loan payments due to a hardship hurt your credit score?

Payment history is the most important factor used to determine credit scores with both the FICO and VantageScore scoring models, so you'll need to speak with your lender about payment deferral before you stop making payments on your loan. After you’ve reached a formal agreement with your lender to pause payments for a limited time, and you have that agreement in writing, only then should you begin skipping the agreed-upon number of loan payments.

While a payment deferral agreement may be reported to the credit bureaus, skipped payments that are mutually agreed upon by the financial institution and the borrower do not negatively affect credit scores. You can further avoid any negative impact on your credit scores by resuming on-time payments as soon as the deferral period ends.

How to defer a payment

According to Medina, deferring payments may or may not be an option for you, depending on the type of loan you have and the financial institution you're working with. And deferred payment options may not be clearly listed on your financial institution’s website.

Medina said it might be best to call your financial institution to see what options it has to help you. "A financial institution might be willing to defer a payment if it seems like a short-term need versus not being able to make any payments going forward,” he said.

Mortgage payments

Depending on your mortgage lender, you may be able to find resources online that outline options if you're struggling to keep up with payments. Fortunately, many major banks, including Chase, U.S. Bank and Wells Fargo, list mortgage assistance options right on their websites.

If your mortgage lender lists deferred payments or mortgage forbearance as an option, you'll want to follow the steps outlined. For example, Chase and U.S. Bank let you apply for mortgage assistance online, whereas Wells Fargo asks you to call in to speak with a home preservation specialist.

» MORE: Government home loans: What are they and should you get one?

Car payments

The Consumer Financial Protection Bureau (CFPB) says that there are several ways to work with your auto lender if you're struggling to make payments. For example, you can ask your lender to change your payment due date, or you can request an updated repayment plan.

You can also request a payment deferral or payment extension, in which case your auto lender may want to work with you and give you time to get back on track. If you have a good credit score, you may even be able to refinance your auto loan to get a new loan with better rates and terms.

Just like with mortgage payments, many auto lenders offer information online about payment deferral and forbearance options. Lenders may also offer a hotline you can call to speak with a loan specialist about payment deferrals and forbearance, so make sure to check.

Credit card payments

You may also get your credit card issuer to waive monthly payments for a set period of time, but you'll have to ask to find out.

Equifax says that, when it comes to credit card payment deferral, some card issuers might agree to reduce your interest rate while others might simply agree to let you make a lower monthly payment for a limited time. Since each credit card issuer has its own process when it comes to customers who are struggling to make payments, your personal results will vary.

Private student loans

Many private student loan companies also have forbearance and payment deferral plans that can give you some time to catch up if you lose your job. SoFi is one such student loan company that is popular for its Unemployment Protection coverage. This protection allows for modified monthly payments on your SoFi student loans if you lose your job through no fault of your own, and it is available in three-month increments for up to 12 months over the life of the loan.

If you're not sure whether your private student loan company has a payment deferral option, call your lender to inquire and find out what assistance is available to you (if any).

» MORE: Government assistance programs: What are your options?

Deferral alternatives

Payment deferral is a short-term solution to your problems since it only postpones debt repayment instead of eliminating it. With that in mind, you may want to consider other options if your bills are too high or you're experiencing financial hardship.

Consider the following alternatives instead of, or in addition to, payment deferral:

• Dip into your savings. If you have some money stashed away and you can use it to pay off debts, Medina said this can be a viable option.
• Consolidate debts. Consider consolidating high-interest debts with a balance transfer credit card or a personal loan. Either option could help you save on interest and/or get a lower monthly payment.
• Refinance debts. Look into refinancing your home loan, auto loan or other types of debts in order to get more affordable and more manageable terms.
• Use your assets. Medina said you can also consider using assets you have to pay off debt. For example, you could tap into your home equity with a home equity loan and use the funds to pay off credit card debt.

» MORE: What is a debt management plan?

Bottom line

Asking your lender if you can skip a few payments on your loan doesn't have to wreck your finances or destroy your credit. If your request is granted, you may even wind up financially stronger in the end since you'll have a few months (or longer) to catch up on bills and get your finances back on track.

Just remember that your lender has to agree to payment deferral for you to avoid negative impacts on your credit score due to skipped payments.