The Effect Student Loans Have on Credit Scores

student loans and credit scores

Many people worry about the effect of student loans on their creditworthiness. However, the effects of student loans on credit scores are similar to those of any other loan. Therefore, on-time payments help while late or failure to make payments hurt the score.

Student loans fall into the category of installment loans, so they have less impact on the credit score compared to revolving loans such as credit cards.

Ways in which the student loan affects the credit score positively:

  1. Student loans are an excellent way to build credit history.

It can be difficult for students to qualify for credit cards or loans once they are through with school due to lack of credit history. Therefore, student loans establish and raise the credit score as long as one makes payments on time.

  1. Student loans sit in the category of good credit.

Many people borrow money to buy luxurious or extravagant items in order to cater to their expensive lifestyle. Don’t fall for using your debt for the wrong purposes. On the other hand, student loans go toward educational expenses, which is a future investment. Student loans play a role in improving a consumers credit score positively and in bank decisions when determining whether one qualifies for a loan or not.

  1. Student loans boost one’s credit

Diversity in types of credit plays a role during the calculation of credit score. The more kinds of credit a consumer has, the higher the credit score will be as long as you pay them on time.

  1. Making payments on time

Repayment of student loans is on a monthly basis. Making the payments on time helps lenders know that they can trust you with credit and raises the credit score.

Ways in which the student loan affects the credit score negatively:

  1. Paying off the student loan early can hurt your credit score

After finishing school, most students are thinking about paying off their student loan. However, paying off student loans makes them inactive. This information remains on a consumer’s credit report, though it may not have a significant impact on the score as compared to the active loans. Therefore, paying off the loan early can potentially lower a consumer’s credit score.

  1. Defaulting on student loans

Defaulting always poses serious repercussions on a consumer’s credit score. It also hinders one from enjoying the deferment right. It hurts the credit score by lowering it thus posing as a possible cause of credit rejection. In any instance, seeking a debt settlement company can be a viable option.

Tips on how to improve the credit score

  1. Credit report delinquencies – avoid them with deferment

Student loans go to a delinquent state the first day one misses a payment. There are chances that the loan will go to this state during a time that one would have qualified for deferment. The lending companies automatically nullify any adverse reports for approval of deferment. If this does not happen, one should send a backdated report detailing the approval date of the deferment request to the lender for them to nullify any adverse effects on the credit score.

  1. Never miss payments

In most cases, federal lenders do not report a missed payment to the credit bureaus before 30 days are over. Therefore, delaying your payments by a week may not lower your credit score. However, if you miss making payments for nine consecutive months the loan goes into a default state. Making on-time payments helps improve the credit score.

  1. Use student loans for educational purposes only

Some consumers use student loans to buy luxurious items such as cars instead of using them for their intended purposes: education. It is important to have self control since it helps one cultivate habits that are vital to maintaining good credit.

Students should not borrow in excess of what is needed. The more one borrows, the higher the repayment burden will be after completing school. There’s a probability that the burden can result in missed payments which lowers the credit score.

  1. Put your loan in deferment

If you are finding it difficult to make payments, consider repayment assistance options such as deferment. This option allows one to temporarily stop making payments.

The deferment option does not negatively affect the account. However, it works best for government subsidized loans since it covers a portion the interest that might accumulate during the said period. If the financier is a private company, interest continues to accumulate at the regular rate and then adds up to the total loan balance.

Simply put, student loans can impact credit scores both negatively and positively. They offer an excellent way to establish a credit history and making the payments on time raises the credit score.

On the other hand, paying off the student loan early and defaulting hurts your credit score by lowering it. These are some tips that one can use to improve their credit score, which includes reporting delinquency and using repayment assistance options such as loan deferment.

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