Can Student Loans Affect Your Credit Score?

A Credit score is a number ranging from 300 to 850 that helps lenders understand how credit-worthy you are based on your previous performance. The higher the credit score is, the more credible one appears to a lender. This score is calculated from data contained in your credit report – a comprehensive file that includes records of your credit activity. If you have federal or private student loans, these affect your credit score – whether positively or negatively. Here is what you should know.

Why do Student Loans Benefit Your Credit?

Applying for a student loan and paying it off on time without missing a payment is good for your credit score. It does this to demonstrate to potential lenders that you can manage debt and pay it back on a long-term basis. The good news is, that as long as your student loan payment is made on time every month, your score will continue to rise. Your score will increase if you have a long history of making positive payments on your credit accounts.

If you are still in school and have not yet made payments, having federal student loans can also help build credit. Federal student loans do not expect to be paid while you are in school on at least a half-time basis. Nevertheless, you can ask your loan servicer to report your account information to the three credit reporting bureaus. This is because it shows that you are a responsible credit user and therefore, it will help increase your score.

In what ways do student loans negatively affect credit?

Student loans can be beneficial to your credit score if paid on time like any other loan or line of credit but defaults have adverse effects on the credit score. It shall be noted that when you fail to make a payment on your student loan and thus become delinquent, this information is reported to the credit bureaus.

The delinquency status worsens with an increased number of payments missed as considered by the credit scoring systems. If you leave it long enough without paying then you could fall even farther behind on your student loans and then default. Defaulting is not paying for 270 days on federal loans and 120 days on private loans. This makes repairing your credit much more difficult.

It includes payment history: this is how you have been paying your debts; amounts owed: this is your current credit utilization compared to your available credit. This metric is called your credit utilization rate. Your student loan balance is directly proportional to your overall credit utilization in the sense that the higher your balance, the higher your utilization will be. Lenders view credit risk when the utilization ratio exceeds 30%, according to financial gurus.

Other Effects of Student Loans on Credit

Outside of on-time payments and balances owed, student loans can impact your credit in a couple of other ways.

• Credit Inquiries: Private student loans, when you apply for them the credit reporting bureau carries out a hard check on your history. The number of inquiries also has an impact on your score and if you make too many inquiries within a short time your score will drop.
• Loan Type: Federal student loans do not usually entail a credit check or a cosigner. This is usually the case for private loans and this may pose a problem when dealing with thin or bad credit history.
• Length of Credit History: A large number of student borrowers are young people who entered a credit environment and got their first credit histories. Timely payments on student loans may not even push up the scores because of the inactivity of accounts across all the credit files.
• Cosigned Loans: When obtaining private student loans, it’s important to be aware that anyone who cosigns on the loan will be held liable for repayment should you fail to meet those obligations. It is also destructive to the relationships because it can tarnish their credit beyond what is reasonable.

How to Manage Student Loans So As Not To Compromise Your Credit?

If you currently have student loans or plan to borrow for college, here are some tips to keep your credit score in good shape.

• Ensure all the loans are paid on time each month by signing up for auto debit payments. That is why even the slightest delay can become a reason for a deterioration of the credit report.
• Try to pay more than the minimum amount due if possible to reduce the balance more effectively. This is useful in helping to maintain a low credit utilization ratio.
• Pay off or renegotiate high-interest debts to reduce the monthly installments. First of all, remember to always weigh the advantages and disadvantages.
• If experiencing difficulty in making payments due to some reasons such as financial difficulties or loss of a job, it is important to get in touch with the loan servicers as soon as possible. They may be able to help or suggest a different repayment plan.
• When taking new student loans, be very cautious and only borrow enough to pay tuition fees and other costs associated with studying. The higher the total amount of credit you have, the more it can affect your debt-to-income ratio negatively.

It is important to keep track of your student loan balances and manage your credit both while you are still in college and after you graduate. As they pay their student loans on time, it means that they will be in a better position to be approved for apartments, get good interest rates for auto and mortgage loans, get good terms on credit cards, and so on.

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