This is the question of more than 70% of students, who graduate from college with a student loan debt. Unfortunately, there is no exact answer because each issue requires details of every certain case. The influence on the credit score depends on how regularly a student pays the monthly payments, what is the loan length, has a student other kinds of installment or revolving loans, how wise students manage student loan debt, etc. Still, the one thing is precise – student loans do influence a credit score. The question is in what way do they affect?
Keep on reading this blog with finance tips to find the answers to the common questions related to the student loan influence on the credit score.
The Nature of Installment Loans
Student loans are the type of installment loans that require borrowers to pay specific (previously determined) payments on the previously defined time. Such loans as mortgage or auto loan are also installment.
The main difference between installment loans (and student loan, as well) and revolving loans (credit card loans, for instance) is that they don’t give the borrowers much benefit. For example, if a person pays off the credit card debt or simply pays the regular payment, his credit score increases up to several points. It doesn’t work with a student loan. This is the increase but not substantial.
Some student loan myths point that several student loans will kill your credit. That’s false. A student can have several student loans but still have a good credit score (which doesn’t work with revolving loans).
Positive Student Loan Effects on Credit Score
1. On-Time Payment Will Help to Build Credit
Though on-time payment on student loans doesn’t change the credit score much, it WILL contribute that 35% of the payment history. It’s especially good for people, who haven’t got credit cards or auto loans. Paying off on-time is a great way to build the credit.
2. Student Loan Helps to Mix Credit
Credit mix makes up 10% of the credit. Not much though, but if you already have a credit card, applying for a student loan is less impactful for the credit score. For the record, it doesn’t mean that you need to apply for credit card urgently if you haven’t got any.
3. Student Loan is Opportunity to Prolong Credit History
The length of the credit history is as much as 15% of the credit score. It means that the longer the payment periods are, the longer will be the credit history and the better will be the credit. While student loans usually go with 20 years of the repayment period, it’s a good opportunity to prolong the credit history.
Still, if you have an opportunity to get rid of the debt faster, don’t lose it.
Negative Student Loan Effects on Credit Score
1. Late Payments Won’t Help Build Credit
The payment history has two sides: it can either help a student build the credit or ruin it. Therefore, if you have the tiniest opportunity to pay the monthly sum, do it. Otherwise, the company will report about the delinquency after 30 days of the negotiated date that you ignored.
If you have an opportunity to make a payment (speaking of the federal student loan), you should consider income-driven repayment loan. If you applied for a private student loan, you should try to refinance it or negotiate with your lender.
2. Default Will Kill the Credit
Both late payments and default stay on the credit report for seven years (even if you paid off the debt after collections). Still, default has more negative effect for lenders than late payments.
It will be very difficult to apply for the loan in future (on the affordable conditions) if you failed on paying off the debt. Creditors lend money basing on the “trust” that the borrower will manage to return them back. Default means they can’t trust you.
Keep Your Student Loan in Order
Student loan seems to be not that damaging on the surface until you are on the first-name basis with it. Once you let your guard down and relax, the debt will hit the credit! It’s possible to avoid such situations even if you feel like you can’t make a regular payment. You should simply turn to your lender or apply to the refinancing programs.
At the end of the day, student loans influence the credit score but it’s you, who chooses what kind of effect it will be!