What Impact Do Student Loans Have on Your Credit Score?

Just like with any other debt, making timely repayments on your student loans will help your credit score, while missing repayments could have the opposite effect. But certain student loans may allow you some breathing room before you’re considered delinquent.

Student loans, like other forms of debt, may show up on credit reports. Payment history has an effect on credit scores since credit scores are based on data found in credit reports, including whether or not repayments were made on time. If you consistently make repayments on time, you can build a positive credit history.

Read on to learn how taking out a student loan can impact your credit score.

How Do Student Loans Affect Your Credit Score?

A student loan can have an effect on your credit in a few distinct ways. The following are among the most typical.

Positive impacts

• A record of timely repayments – Paying full and on time each month will enhance your credit score, just like paying on time and in full would with any other form of credit. 35 percent of your FICO Score is based on your payment history, therefore it’s important to keep up with your obligations.

• Strong Credit Profile – It looks good to lenders if you can prove you can handle multiple credit types. That is to say, it is preferable to have a student loan plus a credit card than it is to have two credit cards. 10 % of your FICO Score is determined by the types of credit you use.

• Excellent credit record – Student loans are a great way for recent grads who haven’t had an opportunity to build a credit history to do so. The duration of your credit history (which accounts for 15% of your FICO Score) benefits from the repayment terms offered by student loans (which can range between 10 to 30 years).

Negative Impacts

• Poor payment history – If you skip a loan payment by thirty days or more, the lender will normally record it to the national credit bureaus. Since your credit history is the most powerful aspect in your FICO Score, skipping one payment can be fatal for your credit score. Even worse, it will stay on your credit records for 7 years.

• Delayed benefits – While it is true that student loans will begin to appear on your credit report as soon as you receive the funds, many graduates don’t begin making repayments on their loans until 6 months after they have received their diplomas.

• Credit inquiry – Private student loan providers and refinancing companies will normally perform a hard inquiry on either one of their applicants’ credit reports, in contrast to the government student loan program, which generally does not require borrowers to undertake a credit check. 
  
  Your credit score will momentarily drop as a result of this, although according to FICO, the average drop for each new hard inquiry is less than five points.

Does Refinancing a Student Loan Affect Your Credit?

Prior to actually refinancing student loans, it’s a good idea to look around for the best interest rate, especially if doing so won’t affect your credit rating. You can avoid having repeated hard inquiries show up on your credit report by choosing either one of the following options.

1. Make an application for each loan option you’re considering within a 14-day window. Hard inquiries for the same type, such as those for a student loan, are treated as a single inquiry under the FICO score model. Your applications will be covered by all versions of the credit scoring model, whether they require 14 days or 30 days, or 45 days, as long as they are submitted within 14 days.

2. Learn approximate rates through pre-qualification with financial institutions. In order to obtain an idea of what your interest rate might be, several lenders provide free rate quotes that do not affect your credit rating.

Applying for refinancing may create a hard inquiry on your credit report, which could temporarily lower your score. As long as you limit yourself to no more than two hard inquiries per credit report (which remain for two years), you shouldn’t see much of a drop in your score. 

The long-term advantages will exceed the short-term disadvantages as long as you keep making repayments in compliance with the new conditions of the refinance and finally pay it off.

Does Paying Off Student Loans Affect Your Credit Score?

Paying on time and carefully managing student loans is a great ways to improve your credit. What about settling the balance in full instead?

After settling off a loan, you may be shocked to see a slight dip in your credit score. Once the account is no longer open, the positive payment history will have less of an effect on your credit score. 

However, the consequence of repaying off debt will be favorable in the long run. It tells lenders that you kept your end of the deal. You can use the extra cash flow to pay down further obligations and improve your debt-to-income ratio. With any luck, you’ll see an increase in your credit score within a few months.

What Happens If You Don’t Pay Your Student Loans?

It’s possible to go into default on your student loans if you let your repayments slide too much. Your credit score will take a major hit in this scenario.

If you are more than 270 days late on your federal student loan repayments, you are deemed to be in default. Once that date arrives, you’ll be responsible for paying off your whole federal student loan obligation in one lump sum. 

If you are more than 90 days late with your private student loan repayments, your loan will likely go into default. To recover a debt after default, you may be subject to collection efforts and perhaps a lawsuit. Credit reports can show a default for up to 7 years after the initial delinquency.

Those who have taken out federal student loans can rejoice, nevertheless. Rehabilitating the debt is one way to get rid of the default on your credit report.

You need to negotiate a new payment plan with your loan provider and make 9 repayments in 10 months to get your student loan out of default and back into good standing.

However, if you let your loan go into default, the loan rehabilitation process won’t be able to fix the damage to your credit score. Rehabilitating a loan does not erase the late repayments that contributed to the default, even if they are no longer showing up as a negative mark on your credit report.

How to Manage Your Student Loan Debt

Now that you know how student loans could affect your credit, you can take the necessary steps to guarantee that it has a positive impact.

• Never take on more debt than is absolutely necessary. Borrowing more money than you need can make it difficult to make the monthly repayments on your student loans, so make sure you simply borrow what you need to fund your education.

• Be prompt and thorough in your bill payment. In your calendar, mark the date that is 2 weeks before the first payment on the loan is due.

• Tell your lender if you’re having trouble making repayments. Consult your loan servicer immediately if you are having trouble keeping up with your repayments. The results can guide your evaluation of whether or not a different potential method of repayment would better suit your needs.

• Graduate. One strategy is to finish school so that you can increase your chances of getting a job that will provide the money you still need to pay off student loans.

• Find other options. Refinancing or forgiving student loans might help if the monthly repayments might be too much for your budget and other options from your lender aren’t sufficient.

Bottom Line

Student loans may have a beneficial or detrimental effect on your credit rating, depending on how they are used. You will be able to avoid the unfavorable effects if you just fulfill your repayments in a timely manner. This is the good news. You may be able to repay your student loans at a lower rate of interest if you take the time to develop a credit history. If this is something you are considering, then you should invest the time to build your credit record.

However, before you send an application, you might think about being prequalified to have an idea of what kinds of benefits you might be eligible for if you submit the full application.