How Student Loans Affect Your Credit
Student loans are a type of personal loan that allow you to invest in your human capital and pay back the cost of school later. Student loans allow you to go to school on credit, so they naturally affect your credit score.
Making student loan payments isn’t fun, but your management or mismanagement of your student loan can have implications on your credit score for many years to come. Make your student loans work for you by leveraging them to capture an excellent education and credit score.
About Credit
Your credit is how reliable you are to lenders. If lenders think you are a reliable borrower, i.e. you are very likely to make full, timely payments, they will likely be more willing to offer you larger loans at lower interest rates.
Having a good credit score can help you save money when you take out installment loans, such as auto loans because you’ll be paying less for the loan.
About Credit Scores
Credit scores are indices calculated from credit scoring models that help lenders determine how credit-worthy potential borrowers are. The most common type is the FICO score, which many credit card companies offer their customers for free.
Major Components of a Credit Score
There are several types of credit scoring models, but they all consider your credit history, credit mix, and length of credit history to calculate your credit score. They get this information from your credit report, which is supplied by the three major credit bureaus; Experian, TransUnion, and Equifax.
How Student Loans Affect Your Credit History
Your credit history is the most impactful element in your credit score, representing about 35% of your credit score. Your student loans can help you improve your credit history when you make on-time payments in full. Defaulting on your student loan or making late payments will lower your credit history.
Some expenses that you must pay each month, including rent and car insurance, are only included in your credit score if you default or miss a payment. Student loans are reported to the credit bureaus when you pay them, meaning you’ll get rewarded for good financial habits, not just punished for mistakes.
How Student Loans Affect Your Credit Mix
Your credit mix accounts for 10% of your credit score and is determined by the types of loans you take out. Having a variety of loans, including personal loans, auto loans, and lines of credit, round out your credit. By showing that you can repay different types of loans, you’ll increase your credit-worthiness.
A student loan is just another type of loan to add to your credit mix. While diversifying your credit isn’t a reason in itself to take out a loan, it is an unexpected benefit of having student loan debt.
How Student Loans Affect Your Length of Credit History
The length of your credit history contributes 10% of your credit score. Because of lengthy student loan repayment periods, student loans give you plenty of time to build up your credibility with lenders.
Being in debt for many years is far from a good thing, but it does come with a silver lining in that it can help you save money on future loans.
Debt to Income Ratio
A large debt like a student loan will increase your debt to income ratio; this is not good news for your credit score. It’s important to note that instalment debt is much less damaging to your credit score than revolving credit, like credit card debt.
If you are looking to take out a mortgage or another large instalment debt, a large student loan may give your lender pause. In general, though, timely payments are much more important than the debt amount.
How to Check Your Credit
A major part of proper credit management is checking your credit score often. You can check your credit score for free each month when you have a Visa credit card through T&I Credit Union.
For more in-depth information about your credit health, you can request a free credit report once a year from each of the major credit reporting agencies (Equifax, Experian, and TransUnion).
T&I Credit Union Student Loans
At T&I Credit Union, we can help you invest in your future with student loans offered through our partnered company, Student Choice. As long as you’re making satisfactory progress toward a degree, you don’t need to begin making payments toward your loan so you can focus on your studies and make the most of your education.
While managing your student loan wisely can improve your credit score, you’ll still need to supply a credit score to qualify for a student loan. As with any other loan, the APR will correspond to your credit score.
If you have parents or other trusted people with excellent credit, consider asking them to co-sign your loan to help you meet the requirements or qualify for a lower rate.
What Happens if You Default on Your Student Loan?
Taking out a student loan is a risk. When you sign a student loan, you’re agreeing to pay for expensive tuition in full, with added interest. Many students bank on entering a lucrative career after graduation to pay for their loans, but what if it doesn’t work out?
The bottom line is that defaulting on your student loans will really hurt your credit score. If you have a federal student loan and miss payments for 9 months, you’re in default. With private student loans, you’re in default if you miss 3 months of payments.
When you miss a payment but can repay it before it’s considered a default, you’ll likely be charged a late payment fee, or delinquency.
Public or private, loan defaults and delinquencies will be recorded on your credit report for 7 years after the fact, even after you pay it back in full. A default on your credit report will signal to lenders that you’re a risky borrower and may hesitate to offer you money, or only do so at exorbitant interest rates.
Tips for Your Student Loan
Exhaust all your options before you default on a loan. One option is to refinance a student loan you’re struggling to pay. You can often find a lower interest rate or lower monthly payments, helping you stay on top of your finances.
If your debts are getting unwieldy, you can consolidate your debt with T&I Credit Union. This enables you to merge your debts into one for a manageable interest rate and simplified payment process.
After you graduate, you’ll have to make student loan payments each month. Make sure to account for this in your monthly budgets. It’s also good practice to budget for unexpected expenses so an emergency doesn’t cause you to fall behind on your payments. Even one late payment can follow you in your credit score for years.
Take-home Message
If you finance your education on credit, you can expect it to show up on your credit score. As with any credit, when you pay back your student loans on time and in full, you’ll be proving to lenders that you are a reliable borrower, and your credit score will go up.
Student loans are large and long-term, so they can have huge negative effects on your credit score as well. Steer clear of defaults and late payments so you can improve your human capital and your credit score at the same time.
To learn more about student loans or debt consolidation, contact T&I Credit Union at (248) 397-9345. We would love to assist you on your path to financial security.