How Student Loans Are Affecting Your Credit
You’ve finished with school and are currently employed. However, your student loans are eating up all of your income every time you get paid. Worse, you might be even going into debt just to pay regular bills. Sounds like the typical life of a Millennial, right? Not so fast...
Being constantly strapped for cash is no way to live. You need to have extra income in case of an emergency. In addition, you'll find it very difficult to reaching your savings goals, buy a home, or whatever other plans you have for your life if you don't have access to enough money.
If you’re struggling to pay your student loans, but you still haven’t done anything about them, it’s time to find a solution. Here is what you should know about how student loans are affecting your credit and why you should be concerned.
Positive Effects of Student Loans on Your Credit
It's easy to feel bad about student loan debt given the fact the payments are often a significant portion of your monthly budget and the interest just continues to pile on month after month. However, student loans aren't all bad, they can actually benefit your credit score in several ways.
Paying on Time Benefits Your Credit Score
Your payment history accounts for a significant portion of your credit score. Unlike other types of payments, such as rent or car insurance payments, all payments on student loans are reported to the credit card bureaus, including on-time payments. As a result, paying your student loans on time helps you to establish a payment history. A good payment history will increase your credit score over time.
Having Student Loans Makes It Easier for You to Build a Credit Mix
If you want a top credit score, you should work to establish a good credit mix. Student loans can help to build a diverse credit mix by providing an additional loan type. The loan types that add to your credit mix include the following:
- Installment loans (auto loans, student loans, etc)
- Mortgage loans
- Credit cards (bank and retail cards)
If you don't have a credit card or an auto loan in your name yet, paying your student loans on time will help you to start establishing a good credit mix.
Student Loans Help You Develop a Long Credit History
The length of your credit history is another important factor in determining your credit score. Given that student loans generally are 20-year payment plans, having a student loan that you consistently pay on time month after month will help you to build up a strong credit history.
Of course, if you have the option to pay off your student loan at a faster rate, then you should make sure to take advantage of it. There is no reason to remain in debt if you don't have to.
Negative Effects of Student Loans on Your Credit
Now that we’ve discussed all of the positive ways that a student loan can impact your credit, here are some of the problems that can arise from student loan debt.
Paying Late Will Lower Your Credit Score
At the three major credit bureaus, Experian, TransUnion and Equifax, student loans are generally treated as installment plans, which means that making payments in full and on time each month is extremely important. The credit bureaus update their records continuously on a 30-day basis so any missed or late payments will appear on your credit report almost immediately after you fail to make the payment.
Even if your credit history has been stellar up to this point, it only takes a 30-days past due report resulting from a late payment to cause your credit score to change. Whether you were late because you couldn't afford to make the payment or you just simply forgot, the credit score algorithm doesn't distinguish between the reasons for the missed payment and the result is the same: a lower credit score.
Defaulting Can Cause Major Damage to Your Credit Score
Defaulting on your student loan doesn't always means that someone is purposeful choosing not to repay their loans. In fact, if you have more than one student loan or you move to another state or country, it can become difficult to keep track of everything.
Regardless of the circumstances that landed you in default, the faster you get out the better. When you default on your student loan, the negative payment history will continue to show up on your credit report for up to seven years even if you pay off the loan in full. Your credit score will be lowered as well until the credit bureaus have decided that the information about your default is too old to report.
When you default on a student loan, it may take you years to re-establish a good credit record. As a result, you'll continue to get denied for a mortgage, credit cards or any other loans that you apply for thanks to a student loan default that might have happened years ago.
Can Deferment Hurt My Credit?
Even with our best intentions, sometimes we can't control the financial setbacks that life deals us. If you are having trouble with keeping up with your student loan payments, you may have considered a deferment so that you'll have a bit of extra breathing room every month. Deferment allows you to temporarily suspend your minimum monthly payment obligations on your loan.
That said, does a deferment hurt your credit? It will not. Although student loan deferment is noted in your credit reports, it won't have an effect on your overall credit score. However, what matters more is that you make repayments on-time prior to deferment approval. If you are late or miss a payment, it will impact your credit score negatively.
Keep in mind that you must keep making payments until you have received a written notification that your request has been approved. If you stop making payments and your request is subsequently denied, you will be delinquent on your loan and may subsequently default.
How Does Forbearance Affect My Credit?
Although forbearance won’t affect your credit, just like deferment, forbearance generally means that you will have to continue making payments on your student loans even though the payment amounts are temporarily reduced.
Whether you have been approved for discretionary forbearance or your circumstances are such that mandatory forbearance applies, you still need to make sure that you are paying the right amounts on time every month to avoid delinquency or defaulting on your student loan.
Get Student Loan Debt Relief Now
Student loans suck so why not fight for your financial freedom? If you’re having trouble paying your student loans, you should get help now if you want to save your credit score.
Contacting your loan servicer is the first step but there may be other options available to you, as well. There are federal loan forgiveness programs available to help you lower or eliminate your payments. Call us now to drop your student loans today.