18
Oct

Loan Default and Credit Score

As you move from higher education to the next phase of your life — maybe buying a car or buying your first home — chances are good you’ll eventually need a loan. Chances are also good that you’re already paying off some student debt.

If it’s been a struggle to make your student loan payments, it’s important to know the possible repercussions of missed payments or a loan default. In all cases, not making your payments can drop your credit score and impact your ability to get a future loan. A low credit score also affects your everyday life, making it harder to take care of basic necessities.

Let’s discuss student loans and the impact of a default on your credit score.

How does education debt differ from other debt?

Student loans are not like credit cards. Credit cards are considered revolving debt. With a credit card, your balance goes up and down, and you can access your available credit in any amount. As long as you make the minimum monthly payment, there is no end date when the balance must be paid in full.

Unlike revolving debt, student loans are fixed. Just like mortgages and car loans, you have a starting balance and a fixed number of payments. If you make your scheduled payments, you’ll pay the balance in full after a set amount of time. Paying the full amount when it’s due every month is critical to keeping your loan in good standing.

What’s the difference between delinquency and default?

Your student loan becomes delinquent if you miss one payment. It remains delinquent until you pay what is past due, or until you make another arrangement. Some people may ask to defer their payments (temporarily stop making payments). Or, they may ask to change their repayment plan by reducing the amount due every month. It’s up to you and your loan servicer to decide what your options are if you become delinquent on payments.

Keep in mind that once your payments are more than 90 days past due, your delinquency gets reported to the major credit reporting bureaus and your credit score drops.

Default occurs when a certain time period has passed and you have not made any payments. For federal loans, default occurs at 270 days of no payment. Defaults on private loans happen much sooner. You can default on a private loan by failing to make payments for three months — or about 90 days.

How does a loan default hurt your credit?

Both delinquency and default hurt your credit score and cause disruptions to your lifestyle.

In addition to possibly being denied a loan, having a low credit score slows down and complicates normal tasks. You may experience obstacles in getting approved for credit cards, signing up for utilities, getting devices and mobile plans, and renting an apartment. If you are able to get approved for some type of consumer credit, you could get stuck paying higher interest rates.

Default can have even more severe consequences. You could become responsible for immediately paying the full unpaid balance and interest on your loan. You could also lose eligibility for deferment, repayment plans or future federal aid. Your wages, tax refunds and other federal benefits could be garnished or withheld from you. You could also end up in court.

A loan default can stay on your credit report for years, hurting your credit score and your ability to move forward in life. That’s why it’s critical that you always pay your student debt in full and on time. If you do find yourself approaching delinquency or default, seek some professional advice to find out how you can repair your credit score.

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