Yes, student loans can affect your credit score just like other forms of borrowing, such as payment schedules that improve your credit, while delays could have an effect on it. Student loans typically offer more additional time regarding late payments compared to other loan types. Generally, student loans, like installment loans, require regular payments over a specified period.
Typically, these payments are relayed to credit bureaus, contributing to your credit history. In addition, you can review data maintained by credit bureaus. Also, you can access complimentary reports from all three primary bureaus. Furthermore, paying up according to schedule establishes a positive credit management record, increasing your overall credit profile.
How Does Student Loan Affect My Credit Score?
Student loans are under the category of installment loans, similar to other forms of borrowing such as auto loans, personal loans, or mortgages. However, understanding how student loans affect your credit score becomes very important. Taking out a student loan can have various effects on your credit status.
Positive Influences
Although numerous students secure student loans before establishing a credit history, these loans can gradually enhance one’s credit score. Several advantages include:
Timely Payments
By consistently paying off your monthly dues on schedule and in full, you can establish and uphold a commendable credit record. Since your payment history significantly affects your FICO Score, maintaining this habit is important.
Excellent Credit Usage
Lenders want to see that you can handle various forms of credit. Securing both a student loan and a credit card improves compared to relying only on credit cards. This mix of credit types contributes positively to your FICO Score.
Extended Credit History
Given that recent graduates might not have had ample opportunities to establish their credit standing, having student loans aids in this aspect. Moreover, the extended repayment periods ranging from 10 to 30 years can extend your credit history, which is beneficial for your FICO Score.
Negative Influences
Similar to other forms of debt, student loans can potentially lower your credit score temporarily or in the long term. Here are some disadvantages to consider:
Credit Inquiry
While some federal student loan applicants are not to credit checks, applying for private student loans or refinancing involves undergoing a hard inquiry on your credit reports. Although each additional hard inquiry has a minor impact on your credit score, it can still cause a few points.
Bad Payment History
Failing to make a payment for private student loans or federal student loans by 30 days, 90 days, or more, lenders report it to national credit bureaus. Since your payment history affects your FICO Score, missing even a single payment can severely hurt it. Also, the delinquency will remain on your credit reports for seven years.
Delayed Benefits
It might come as a surprise to some college students that the impact of student loans on their credit history isn’t significant until they commence repayment after graduation. If the student loan on your credit report shows after receiving the funds, the significant benefits come from making timely payments. These results are for numerous students only to start doing six months post-graduation.
Refinancing Student Loans
Refinancing your student loans involves a lender covering your outstanding debt and securing a new private student loan. This potentially offers a lower interest rate or modified repayment term. Additionally, this can lead to significant interest savings over time and potentially reduce your monthly payment amount, although extending the repayment period. However, qualifying for student loan refinancing necessitates a strong credit history.
While refinancing can offer financial benefits, it also comes with disadvantages. Refinancing from federal to private loans forfeits federal program benefits such as income-driven repayment plans, loan forgiveness, or deferment options. Moreover, once you refinance to a private loan, you can’t switch to a federal loan. Additionally, consider the age of your student debt before pursuing refinancing, as it may not be advantageous depending on when you initially borrowed the funds.
Regardless of your situation, understanding the influence of your credit score on your student loans is crucial. Timely payments are essential for establishing and preserving a positive credit history.
How Student Loans Can Improve My Credit
Student loans can be beneficial for your credit, providing you to maintain regular monthly payments. Otherwise, failure to do so may result in a decrease in your credit score. If you have a limited variety of credit accounts, securing student loans listed on your credit report can include your credit mix, potentially enhancing your creditworthiness. Moreover, securing student loans at a young age can extend the duration of your credit history, positively affecting your credit score.
Furthermore, if you are just beginning and have few open credit lines, student loans can significantly contribute to the average age component of your credit score. For instance, suppose you secure a student loan during your freshman year of college. By the time you graduate, this account will have been active for several years, consequently enhancing the average age of your credit history. Lastly, if you keep securing new student debt each semester or academic year, you could diminish the average age of your credit history.
Conclusion
As far as you ensure you pay back your student loan as agreed, it will have a good effect on your credit score in the long run. However, failing to meet your repayment obligations can lead to significant damage to your credit. If you encounter difficulty in making payments, it’s crucial to reach out to your loan servicer to explore options such as forbearance or deferment.
