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Will financial hardship affect your credit score?


Credit reports now show details of financial hardship arrangements like payment pauses or reductions. What does it mean for you?

This change, which came into effect on 1 July 2022, should benefit people with financial hardship arrangements. It means the repayment details on their credit report will be based on the arrangement – not the typical account requirements.

Equifax's head of advisory and analytics consultancy services Kevin James told Finder that it lowers the risk of black marks when people are actually dealing with financial hardship.

"What would have happened pre these improvements to credit reporting is, if somebody was paying off a [hardship] payment … the repayment indicator would be showing them as delinquent. Today, that is not the case," he said.

As long as you keep up with a payment arrangement that's been shared between both parties – borrower and lender – it's deemed as repayments [being] up to date and there's zero impact to the borrower.”

Kevin James, Equifax head of advisory and analytics consultancy services

So your credit score won't be affected if you have a financial hardship arrangement in place and meet its requirements.

"If you don't have one, then the impact will be there because you are viewed as a non-payer," he said.

How do credit reports show financial hardship arrangements?

Lenders now have 30 days to report financial hardship arrangements based on when they start.

When an arrangement is in place for an account, it will show an "A" or a "V" based on the type of arrangement:

  • Temporary arrangements (A)
  • Permanent variations (V)

Temporary arrangements can help when you're experiencing a challenge that may affect you for a short period.

For example, banks offered loan deferrals and reduced payments to people affected by floods earlier this year. You can also get temporary financial hardship support for sickness or another change in circumstances.

A permanent variation means the change is ongoing. An example is extending the term of a loan to make repayments more manageable.

"Both of these [types of] flags will remain on the accounts for 12 months, but they don't impact any form of adverse payment history," James said.

The Australian Banking Association has released a fact sheet about the changes, with examples of how it works.

How it could affect new applications

When you apply for a new loan, credit card or other credit products, lenders will see any hardship variations on your credit report.

But it won't necessarily mean your application is declined.

"That's very prescriptive in the code. The hardship flag or variation flag cannot be used for an automatic decline," James said.

What it can be used for is to ask additional and relevant questions … to ensure the product's suitability and requirements are good for both the lender and borrower.”

Kevin James, Equifax head of advisory and analytics consultancy services

In comparison, an actual default could be grounds for an application to be automatically declined.

"That is an adverse mark in terms of your credit rating and your credit history," James said.

He added that even late payments can be factored into a credit decision because they can show that "willingness to pay is a challenge".

"So I think this change is a positive," he said.

"It also allows the borrower to engage and find a solution that doesn't impact them for a long term."

If you need help now, contact your bank or call the National Debt Helpline on 1800 007 007. Want to check your credit report? Get your free copy and credit score through Finder.

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