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Credit Card Payment Deferrals
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With the Canadian economy in a lull as non-essential businesses remain closed to slow the spread of COVID-19, nearly two million Canadians filed for unemployment in April and many are faced with the challenge of balancing and prioritizing bills as they become due. At the request of the federal government, banks have begun to work with Canadians to grant credit card payment deferrals on a case-by-case basis.
Should You Defer Your Credit Card Payments?
The decision to defer credit card payments depends on your personal finances. In general, it’s best if you can keep up with your bill payments and other financial obligations because they will still be owed regardless of whether or not you defer them. Deferring any kind of payment will simply put off the financial obligation and make it bigger in the future.
That being said, the COVID-19 pandemic has caused financial distress for many people. For this reason, you may have no other choice but to defer your credit card payments. It all depends on your unique financial position. Make sure to assess your finances before making a final decision.
Click here to see if you can get a mortgage deferral due to COVID-19.
What Is a Credit Card Payment Deferral?
A credit card payment deferral allows you to hold off on making payments for a specific amount of time until your financial position improves. To be clear, the amount you owe is simply deferred and not cancelled. You will be expected to continue making payments once the deferral period is over.
When Not to Defer Your Payments
When determining whether or not to arrange for a payment deferral, it is crucial to understand the true cost of doing so. There may be fees associated with payment deferral plans and understanding what those fees are will go a long way in your decision to either make the minimum payment or to request a payment deferral.
In addition, experts caution that using payment deferral offers may enable discretionary purchases or spending. Doing so will only add to the existing balance, which is accruing interest, and inflate your financial burden. In short, deferring your credit card payments should only be used as a last resort.
How Do I Apply for a Deferral?
To arrange a deferral for your credit card payments, you will need to contact your bank. While deferral terms and processes vary for each bank, they all have a few common requirements:
- Account is in good standing and not currently past due
- No bankruptcies
- No delinquencies
- No previous applications for COVID-19 payment deferrals
- Account must be at least 4 months old
The five largest retail banks in Canada are encouraging those facing financial hardship as a result of COVID-19 to contact them directly to discuss the different options available for assistance.
Click here to learn about the government CERB program.
Pros and Cons of Deferring Your Credit Card Payments
While deferring your credit card payments may seem like a straightforward solution, there are several factors to consider before doing so.
- Temporary Relief. During periods of crisis or when faced with one-off expenses that leave you short for cash, arranging a payment deferral with your credit card issuer may be a much better alternative than to miss a payment. Missing a payment will likely result in a late fee that exceeds any payment deferral processing fees and will directly impact your credit rating.
- Interest. The balance will still be accruing interest during your payment deferral period. Depending on the length of the deferral period, the existing balance and the interest rate, the added interest may significantly prolong the time it takes to pay off your credit card. Be sure to review any payment deferral offers from your credit card issuer with a fine-tooth comb, as surprise processing fees and terms regarding continuous interest accrual are often hidden in the fine print.
- Credit Scores. While most experts claim that credit card payment deferrals will not affect your credit score, it is crucial to keep a paper trail of any arrangements made with your credit card issuer. A detailed record of this arrangement will help prove that these were arranged payment deferrals and not defaults thereby safeguarding against any errors in your lender’s credit reporting.
Other Types of Credit Card Debt Relief
In addition to deferring your payments, most lenders have different programs available to assist those running into financial difficulties. The most common credit card assistance options are listed below.
- Due Date Extensions. If a sudden cash-flow problem has made it extremely difficult for you to make your minimum payment on time, a due date extension may be possible. Typically, this option is most suitable for scenarios where a short-term hindrance such as an unexpected expense, arises just prior to your monthly payment falling due.
- Waived Interest. Some credit card issuers may be willing to waive the interest on existing balances for a specific amount of time. For example, Apple has recently introduced a new Customer Assistance Program in response to COVID-19 which allows cardholders to defer a monthly payment without incurring interest or penalty fees.
- Hardship Plan. For those facing financial difficulties as a result of hardships such as illness or loss of income, you may qualify for a credit card hardship plan. These programs are typically negotiated with your card’s issuing bank and feature changes to your repayment terms such as waived and/or lowered interest rates. Terms will vary on a case-by-case basis depending on your circumstances.
- Forbearance. Credit card forbearance programs are created by lenders to provide temporary relief to cardholders in the form of postponed payments for a certain period of time. The caveat is that a forbearance may not stop interest from accruing and you will still eventually have to pay off the existing balance.
Alternatives to Credit Card Deferrals
For those carrying a large balance on their credit card, a payment deferral may not be ideal as you would be increasing the time it takes to pay off the amount while incurring increased interest charges. Below are some alternatives to deferring your card payments.
- 0% Balance Transfer. By transferring your existing credit card balance to a credit card with a lower interest rate, you could enjoy substantial savings on interest costs and be able to pay off the amount a lot faster. This is because a higher portion of your payments would be applied toward the principal balance rather than going toward high-interest fees. Certain credit cards even offer 0% introductory interest rates on balance transfers for periods of up to one year.
- Personal Loan. A personal loan is a great alternative to credit card deferrals as it allows you to spread out your debt and save on interest costs. Personal loans typically feature much lower interest rates than credit cards, which could be an opportunity for you to consolidate your credit card and other unsecured debt.
Is a Credit Card Payment Deferral Right For You?
Everyone’s situation is unique and there are many different paths to achieving financial freedom. Evaluate your options carefully and select the one that is right for you and your budget.
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