If you have student loans, you’ve probably have wondered how they affect your credit score and your ability to take out future loans. No matter how much student loan debt you have, whether it is $15,000 or $100,000, your credit is affected in both positive and negative ways.
Your credit score is a reflection of a person’s creditworthiness. This is the number that lenders will look at to determine how likely you are to repay a loan based on several factors, including your credit-to-debt ratio and your repayment history. This is the score that can determine your ability to take out a loan for a car or a house, and it affects your ability to get a reasonable interest rate. The higher your credit score, the more likely you are to be approved for a loan and get a low-interest rate. This means, at the end of your loan term you pay less than someone who is given the same loan with a high-interest rate.
Student loans are considered to be installment loans. This means that you take out an initial amount of money that is then repaid over time with a fixed number of payments. This is much like the terms when you take out a car loan or a mortgage.
So just how do your student loans affect your credit rating?
The Positive Impact on Your Credit Score
Although your student loan debt can affect your credit score doesn’t mean that it has to be a negative impact. There are many upsides to taking out student loans.
Although we would all love to be able to avoid having to borrow money for school, for most students this is not possible, and student loans are necessary.
Longer Credit History
One of the positive aspects of having to take out student loans is that they can jumpstart your credit early on, giving you a longer credit history. Longer credit history can result in a higher credit score. For many students, this is their first piece of credit.
Grow Your Credit Score
While you are paying back your student loans, you can increase your credit score just by making your payments on time. This will reflect a positive credit history and show that you are responsible for paying back the money you borrow. No matter how you choose to pay back your loans, whether you are on a standard repayment plan or an income-driven repayment plan, making consecutive payments on time, without being late from the time that you take out your first loan until you finish paying them off, will help you grow your credit score.
It is also important to note that if you put your loans into forbearance or deferment due to financial hardships, this will not affect your credit score.
Adds Variety to Your Credit History
Chances are, your student loans will not be the only money you will borrow throughout your economic life, such as credit cards, cars, and houses. Having student loans will add variety to your credit history, which in turn can help boost your credit rating. It is this variety that many lenders look for when determining whether or not you are a good candidate for a loan.
Easier to Recover From Delinquency
Becoming delinquent on a loan can be difficult to recover from, but student loans aren’t like other loans. With student loans, you can work with your lender to become up-to-date with your payments and even have your delinquent payments. If your credit score is suffering from delinquent payments, you can more easily recover from those missed payments, and your score will increase.
The Negative Impact on Your Credit Score
There are some positive impacts that your student loans can have on your credit score, but there are also some negative consequences.
Sometimes life happens, and you may not be able to make some of your payments, and this can lower your credit score. If you happen to miss a payment, don’t panic. A late payment cannot be reported until it is at least 30 days past due, and most student loan lenders don’t report missed payments until 60 days past due. If you miss a payment, check with your lender and see how long you have under your missed payment is reported. Once it is reported, it can damage your credit and lower your score.
Will Higher Student Loans Lower Your Credit Score?
Contrary to popular belief, higher student loans don’t automatically mean you have a lower credit score. In fact, credit cards have a much bigger impact on your credit score than your student loans. The reason credit card debt has a larger effect on your credit score and how future lenders view you as a potential borrower is because it has been shown that how you use and pay back credit card debt is a better indicator of how you will treat other loans.
If you want to keep your credit in good standing, then the most important aspect of your student loans to focus on is making your payments on time and work to pay them off.
Keeping Your Credit Score In Good Standing While Paying Back Your Student Loans
For many people, the repayment of their student loans can last for years, and sometimes even decades. During this time it is important to be sure that you may all of your payments on time to keep your credit score in good standing.
If you find yourself in financial difficulties and you cannot make your minimum payment, talk to your lender and see if you can work out a lower payment. If you have federal student loans, then you may want to consider getting on an income-driven repayment plan so that your payments will better reflect your income. This may help you be able to make your payments so that you don’t become delinquent.
If you have private student loans, you may want to consider consolidating or refinancing your student loans, after talking over options with your current lender. Refinancing your student loans can lead to a smaller interest rate or a longer loan term. This, in turn, can lead to smaller monthly payments. Just be aware that when you apply to refinance or consolidate your loans, your credit score can take a hit and lower a few points. These inquiries can stay on your credit report for up to two years.
How Student Loans Affect Home Ownership
Home ownership is touted as being the pinnacle of success and a good credit score. So how does your student loan debt affect your ability to buy a home?
You’ve heard the reports about how Millenials are buying houses at a lower rate than generations before. The increase in student loans has a large impact on this. Younger generations have more debt than generations before them. This is mostly due to growing amounts of student loan debt and this can keep a person from being able to afford a mortgage or even being approved for a loan.
Many students leave college with massive debt, only to get a job that doesn’t pay enough to pay those loans back. The average salary after college in 2017 was $49,785 a year. If you have more than $100,000 in student loan debt and are making under $50,000 a year in income, getting a loan to own a home may be difficult.
When you are being considered for a home loan, there are two factors that are taken into account: credit score and the impact the payment will have on your finances.
When you are considering buying a home, your debt-to-income ratio impacts how well you will be able to handle a mortgage, and your lenders will focus on this. This means that your monthly debt payments are compared to your monthly income. The Federal Housing Administration (FHA) standards recommend that your debt should not exceed 43% of your income. This doesn’t just include your student loans, but all of your dent; credit cards, car loans, etc.
If you are looking to own a home, it is a good idea to work on paying down your debt and get under this 43% mark. You will then be more likely to be approved for a home loan.
Take Away
Your credit score is affected by your student loans. Whether it is positively or negatively affected is primarily up to your ability to stay current with your monthly payments. The quicker you can pay off your student loans, the better standing your credit will be. Your credit score is generally not affected by the number of student loans you have. Instead, your ability to make your payments has a bigger impact.
If you are having trouble keeping up with your monthly payments, you want to talk to your lender first before you let them become delinquent, as this will negatively affect your credit score.
Your student loans may also affect your ability to get a home loan. If this is a goal you are after, be sure to pay down as much debt as possible until you are under 43% of your debt-to-income ratio.
Originally published at www.studentloandiet.com on August 15, 2018.
