How Student Loans Affect Your Credit Score

When you’re in college, you generally don’t think about how student loans affect your credit. Student loans are means to an end; they’re the instruments that get you from meager student to expert in your field. Student loans can seem harmless at times – after all, most people have to deal with student loans at some point in their lives – but they can actually have a big impact on your credit score. In fact, the mismanagement of your student loans can leave your credit in tatters.

Credit Score Basics

To understand how student loans affect your credit score, it’s important to understand what your credit score actually signifies. Your credit score is a snapshot of how your credit appears at a specific point in time. It changes constantly based on your behavior, which includes your management of student loans. Credit scores are made up of five different factors. Of these, two elements – your payment history and your ratio of used debt to available debt – comprise two-thirds of your score.

Student Loan Implications

Student loans can significantly affect both these critical areas. Taking out additional student loans each semester – especially those in excess of what you actually need – add extra debt to your overall load, affecting your credit ratio. Furthermore, if you find yourself missing payments, your credit score will certainly take a hit. Banks usually report any payment more than 30 days late; since your payment history is the most important factor in your credit score, late payments affect your credit score more than anything else.

Your Options

You can’t do anything about your need for student loans. According to The New York Times, the average college student leaves school with $25,000 in student loan debt, and those who attend graduate school or law school have exponentially higher levels of debt. While student loans are a necessary evil, it pays to be smart about your student loan management, especially if you’re done with your bachelor’s degree and are considering continuing your education.

Face Reality

If you’re thinking about going back to school, take a hard look at your situation and honestly ask yourself if getting this degree will solve all of your problems. Many people have trouble finding a job or getting ahead at their companies and assume that getting an advanced degree will take care of everything. Unfortunately, that isn’t always the case, and the wrong choice will not only put you back where you started, but leave you with a crippling debt load as well.

Income-Based Repayment

The high cost of student loan repayment often takes people by surprise, and the struggle leads to a downward spiral of missed payments and a tarnished credit score. With the starting salaries of college graduates down drastically from prior years according to the Huffington Post, income-based repayment is a great way to ensure that you don’t send your credit score into the shredder. Income-based repayment is tied to your salary; since you never pay more than 15% of your paycheck, you’ll be able to pay your loans while maintaining a decent standard of living.

Forbearance and Deferment

Even if you take every conceivable precaution, you may find yourself unable to make your payments. In this situation, the worst thing you can do is dodge calls and ignore the problem. Instead of running, call your lender immediately and explain the situation. Most student loans come with generous forbearance periods during which you’re not responsible for monthly payments, giving you a chance to catch up on everything else without your student loans destroying your credit score. Interest accumulates while your loans are on forbearance, but your credit score won’t suffer.

People are very down on student loans, and it’s certainly a pain to make payments every month. But such loans are essential these days, and they can ruin your credit if you let them. With some foresight and the knowledge of what to do if things go wrong, you can manage and pay off your student loans without damaging your credit score.

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