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If you're facing challenges with making your credit card payments on time due to job loss, furlough, or reduced income, you may be wondering if you should take advantage of the credit card forbearance programs many lenders have rolled out during the coronavirus pandemic.
Credit card forbearance lets you delay your monthly credit card payments for a certain period without incurring late fees, activating penalty APRs, or negatively impacting your credit score.
That being said, just because forbearance is available doesn't necessarily mean it's the best choice. Here are some pros and cons to think about before making your decision:
Pro: Extra cash in your pocket right now
The primary advantage of credit card forbearance is that it frees up the funds you would normally spend on your monthly credit card payment. If you're deciding which bills to prioritize while uncertain about having enough money for rent or groceries, having an extra hundred dollars to cover essential expenses can make a significant difference.
Con: Higher interest to pay later
A major downside of credit card forbearance is that your balance continues to accrue interest, even during the forbearance period. Keep in mind that credit card interest compounds—if you don't pay off your balance this month, the interest charges from your current billing cycle are added to your balance, increasing the interest for the next cycle (and so on).
If you continue to use your credit card while it's in forbearance, your balance—and the interest on it—will grow even faster.
Pro: Missed payments won't impact your credit score
Under the FICO credit scoring system, your payment history makes up 35 percent of your score. Typically, a single missed payment won’t drastically affect your score (and if you’ve always paid on time, you can contact your lender to request the removal of the negative record from your credit history), but missing several payments will start to impact your score.
With forbearance, your missed payments won’t be counted against you. This means your credit score won’t drop simply because you’ve missed a few payments.
Con: Your credit score might still decrease
FICO states that 30 percent of your credit score is determined by ‘amounts owed.’ If your total credit card debt increases, your score decreases—and this includes both your remaining balances and any unpaid interest. (After all, unpaid interest is added to your balance.)
This means your credit score could still be affected during forbearance, particularly if you're adding new charges to your card without reducing your existing balance.
Ultimately, deciding whether to apply for credit card forbearance comes down to weighing the benefit of having extra money now against the potential cost of paying off a larger balance later. While your credit score may dip slightly due to increased credit card balances, the real question is whether you'll be financially prepared to manage your credit card payments once the forbearance period ends. For instance, your monthly minimum payments could rise depending on how much your balance increases. Will you have enough extra funds to cover those higher payments? Will you be able to make more than the minimum payments and reduce your credit card debt?
Many people are facing financial uncertainty right now, so you might not have all the answers to these questions yet—but it's crucial to keep them in mind as you consider credit card forbearance. Every charge on your credit card needs to be repaid at some point, often with interest (unless you decide on bankruptcy, which has its own pros and cons). Forbearance gives you the option to delay those payments for a few months. Just make sure you make that decision with full awareness of what it entails.
