Payment holidays, also known as payment deferrals or forbearances, were an excellent way to stabilize the payments industry as COVID-19 took hold. The problem is that many holidays will begin to expire soon, causing a bubble in credit card aging and stress in households across the world.
The New York Times points out, in a Reuter’s pick-up, that:
- “People are now making some real decisions about their businesses and the ongoing viability of them without having a temporary support system to keep them going. We’re in for a pretty difficult next six months.”
The critical issue about payment holidays is that they do not forgive the debt. Forbearances freeze the account aging for a specific period. They follow company-driven standards rather than an industry mandate. In some cases, interest will continue; in others, it might be forgiven. Unless the creditor extends the deferral, consumers will need to deal with the expiration.
- “Significant credit card losses won’t show up until 180 days past the end of (forbearance) programs,” Bank of America Chief Financial Officer Paul Donofrio said on Thursday. “I would not expect to see significantly higher losses until 2021.”
- JPMorgan Chase & Co, Bank of America, Citigroup, and Wells Fargo & Co have all extended programs launched this spring that allow customers to delay payments on their credit card balances or loans without incurring late fees or hurting their credit.
This issue extends far beyond the U.S. HITC notes that U.K.-based Barclays is likely to extend the term another three months, but that policy does not look consistent throughout the globe.
- The payment holiday for personal loans is typically for three months. Once the period has ended, customers need to resume their regular monthly payments.
- In the ‘Barclayloan payment holiday ending’ page, the bank has explained that customers have two options should they wish to extend their payment holiday.
- First, people can make reduced payments every month in case they need further support.
- Second, customers may have the option to extend their payment holiday for a further three months.
And the BBC notes that the FCA plans to continue the deadline until October 31 for some lending products.
- The Financial Conduct Authority plans to extend the deadline to apply for a payment freeze until October 31.
- People who have already applied for support will be able to ask for a further payment deferral.
- The proposals cover motor finance, buy-now-pay-later, rent-to-own, and pawnbroking schemes.
- “It is vital that people facing temporary payment difficulties because of the impact of coronavirus get the assistance they need,” said Christopher Woolard, interim chief executive at the FCA.
We have not seen a mainstream answer in how the U.S. will contend with extending the payment holiday, and it is essential. The challenge is that the discretion for forbearance programs remains in the hands of issuers.
This will make a difference come August (or in markets that adjust by another 90 days, in November). Write-offs will surge on a six month lagged basis, particularly if supplemental unemployment compensation does not renew. And that is the day of reckoning in payments and COVID-19.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group