Interest free Coronadrafts and their effect on credit ratings

Darkslider

I've done a search and found lots of similar discussions on the Corona payment holidays for mortgages, but I wondered what we thought the effect of applying for the 3 months interest free overdraft on a current account might be on credit ratings?

It seemed to me that an interest free overdraft is a much lesser sin than admitting you're unable to pay your mortgage, so I've applied for it with Lloyds for a bit of extra peace of mind as I'm out of work currently. Very simple to do, an instant decision and the small print only mentioned my borrowing might be restricted with Lloyds for the 3 months it was active, but not with any other lenders and not once the 3 months are up which would indicate it will have zero impact.

Any other thoughts on the matter? I fail to see how modifying the interest rate on an overdraft would even be picked up by the CRAs or what it would be classified as  (a 3 month DMP?  ) but thought I'd ask the question anyway!

D3xt3r5L4b

Depends if they report it to the CRA’s or not and how they report it. 

yksi

"Ratings" are numbers that are made up. But in answer to the question you did not ask, lenders can clearly see when a debt repayment drops below what would reasonably be considered a minimum repayment and they will know instantly that you applied for a repayment holiday - and draw the conclusion that you were unable to service your debts. As an example, my personal loan holiday clearly showed repayments of £1 for three months in a row and I would be a fool not to realise that lenders can see why. Ain't no company in this world lending out £20,000 with a £1 per month repayment arrangement which only applied during 2020.

However... in your case I'd do it anyway. Your mortgage is already in place and you will certainly not be the only one with something like this, so at the time when you need to refinance you might well find it's no big deal.

Darkslider

yksi said:

"Ratings" are numbers that are made up. But in answer to the question you did not ask, lenders can clearly see when a debt repayment drops below what would reasonably be considered a minimum repayment and they will know instantly that you applied for a repayment holiday - and draw the conclusion that you were unable to service your debts. As an example, my personal loan holiday clearly showed repayments of £1 for three months in a row and I would be a fool not to realise that lenders can see why. Ain't no company in this world lending out £20,000 with a £1 per month repayment arrangement which only applied during 2020.

That's not relevant with an overdraft though as there's no minimum payment required, you can stay in it as long as you like. Obviously being in an overdraft persistently probably has its own effect and will be visible, presumably lenders will assume you're unable to clear the overdraft and are being forced to borrow at the new rates of 40%, rather than seeing the full picture that it's 0% hence why you're not too bothered about remaining in it for 3 months?

D3xt3r5L4b

But an overdraft can be closed at any given time with no notice and they can demand immediate repayment. 

Thrugelmir

Application for an interest free overdraft is made to the lender on the basis that the applicant is struggling financially due to Covid. The debt will be flagged as such on CRA's.  As a consequence this will be a permanent marker on the credit file for the 72 month duration. That will be considered when future applications for credit are made. 

sourcrates

The interest free period granted to OD customers has no effect on anything, and its 3 months, where you get 72 months from I just don`t know, all that is shown on your credit file is your payment history, your OD limit, and what your balance has been over time, it does not show if interest is charged or not.

yksi

Isn't it treated the same as any debt - you can see both the amount owing this month and the repayment received? In other words they can instantly tell whether either amount changed (ie can conclude the interest rate or lack thereof). Banks keep telling us these holidays have no impact on our "score" (sic) but they've conveniently omitted the fact that lenders can see what's happened anyway.

sourcrates

You don`t make any specific repayments on an OD though, you are not required to, yes it shows if its been used, but as regards interest, it is not recorded, so will have no impact at all.