Whether you like it or not, your credit score and credit report will affect many aspects of your life, both now and in the future. Credit scores will determine if you can buy a car or a house or get credit cards. If you’re still attending college, you must also consider the ways in which your student loans affect your credit score.
If you’re in college already or on the way there, you may be acquainted with credit reports and credit scores. But students need to ask themselves if they care about the affects of student loans on their credit report.
What is Included in Your Credit Report?
A consumer report or credit report will determine whether you are credit-worthy, when you go to get a loan or a line of credit for any purpose. It includes a great deal of personal information, including your social security number, address, place of employment and date of birth.
Credit reports also include all of your credit accounts, like student loans, mortgages, auto loans and bank accounts. They list inquiries about your credit from companies to which you may have applied for credit, as well as public records and any collection agency activity for late or overdue bills.
Three credit bureaus track your credit score and report. They are Equifax, Experian and TransUnion. You may request to view their reports at their bureau websites, if you’re asking yourself: do student loans affect credit score?
Your credit score is a calculation that determines your credit worthiness. Your score is judged against the scores of other people, and this provides potential lenders with accurate information on the way you pay your bills – timely or not. Mathematical formulas determine these scores, and lenders rely on them heavily.
How Can Student Debt Change Credit Reports
Your credit report is a snapshot of your personal credit history. This is why you need to be familiar about the way your student loan can affect your credit score. Although the formula used is complex, the basic fact is that if you have a lot of debt in relation to income, your score will be lower. Judgments against you and late payments will bring it down even more. That is certainly not the way you want potential creditors to see you.
Credit Scores – Behind the Numbers
Do student loans affect credit score? To answer this question, it helps to understand credit scores. The score itself is fairly simple. It typically falls between 300 and 900. The higher the score, the more credit-worthy you are considered to be. If your score is 720 or better, you will get better interest rates on loans, credit cards, etc. Good scores can fall quickly, though, if you miss payments, or have too much debt with too little income.
Where Does Student Debt Fit Into the Bureaus Reporting?
If you are looking for private student loans, as long as it’s done in a focused time period, it should not affect your credit score. You should do thorough research on student loans before you apply, so you’re not needlessly creating inquiries on your credit report.
Do Student Loans Hurt Consumer Credit?
Yes. Did you know that paying off your student loans early may not help your credit score? In fact, any debts paid off quickly can hurt your score. That doesn’t make sense from your perspective, but it does from the business standpoint. Lenders earn money on the interest you pay them for your loans. If you pay loans off quickly, they don’t earn as much.
So, then, you may think that perhaps you should pay your loans strictly by the payment plan provided by your lenders. For example, if you have a Sallie Mae student loan with a 10 year payment plan, you should pay it off exactly within that time frame, right? This can cause a hit on your score, too. It makes it look like you take too long to pay your debts. When you ask, how do student loans affect credit score, you have to approach it from all angles.
It doesn’t sound like there is any way to win, does it? It’s not completely hopeless. You can find a happy balance and pay off your student loans in a way that won’t adversely affect your credit score.
Managing Student Debt and Credit Scores
The best way to keep student loans from affecting your credit score is by making sure you borrow as little as you can in the first place. Get as many scholarships and grants as you are eligible for, to lower the amount you’ll need to finance. Does student debt have an impact on consumer credit? They affect it less if you need to borrow less.
Pay the interest on student loans before you have graduated. You may need to get a part-time job, but it will be worth it. Work extra hours during your summer breaks.
After you have graduated, you usually have a grace period before repayment of student loans is required. The period for most loans is about six months. This was designed to give you a chance to get steady work. If you begin a career before your grace period is over, make payments on your interest amount, or put the money you will soon be paying on your loans into a savings account. Then you’ll have the first several payments set aside.
Miss a Payment?
Does student debt have an affect on credit scores? If you miss payments or default on your student loans, this will negatively impact your credit score. Set reminders on your phone and note them on a calendar, so you don’t forget them.
Do not default on your student loans under any circumstances. This will destroy your credit-worthiness and make it quite difficult to rebuild your credit. Defaults on student loans stay on your credit report for a whopping seven years. The bank providing your student loans will have great power over you, more than most any other lenders. They can easily garnish your wages. In fact, they can garnish even Social Security and disability checks.
Do everything you can to pay your student loan debt. You may consider a deferment, forbearance or a new repayment schedule. If you cannot pay your loans, contact your lender as soon as you know that, and negotiate with them. If they will not work with you, seek loans from friends or family. You may need to secure another job.
The Big Picture
These tips will help you avoid negative impact on your credit score and credit report. Now you know the answer that educational loans will indeed impact your credit. You will need to plan ahead and develop a strategy, so that you will have the funds available to make your payments on time. In this way, you can protect yourself from becoming a bad credit victim.
Author: Jeff Gitlen
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