What is the Impact of a Student Loan on Your Credit Score?
Having to pay back a student loan can be a real bummer and it’s a frustrating process, especially because of the student loan impact on credit score. But there can be an upside if you pay back the loans on time. In fact, regular payments can help your credit.
How Can a Student Loan Impact On Your Credit Score
There can be both a negative and positive student loan impact on credit score depending on your payment practices. A student loan typically has a long repayment period so the score will get a boost from a long credit history. Your payment history has a big impact on your score so if you make your payments on time every month, it helps build up your credit. However, if you do default on the loan or have late payments, it can hurt the score.
Positives of Student Loan Impact on Credit Score
Student loans are not impossible to deal with. There are some positives when it comes to a student loan impact on credit score. If you make at least the minimum payment and make those payments on time, you can build the score with a positive credit history.
Paying On Time Makes Up 35% of the Score
Payment history has a big student loan impact on credit score. Many things you make a payment on, such as car insurance and rent, aren’t usually reported to credit bureaus until you stop paying them.
Even though some payments aren’t reported to credit bureaus and don’t have a positive impact on your score, student loans do. The payments you make on your student loans can help you establish a good payment history. If you don’t have any other loans in your name then paying a student loan on time can help you start building credit from a younger age.
Easier to Build a Credit Mix
A credit mix doesn’t have as big of an impact on your credit score but it’s still important. A credit mix is the mixture of credit you have and this can include auto loans, credit cards, and mortgages. The more you have and the better variety, the better it will look on a credit report. If you already have a credit card then a student loan will help give you more credit mix.
Long Repayment Means Long Credit History
Another positive student loan impact on credit score is the following. The length of your credit history will influence about 15% of the score. Since student loans usually come with 10-year repayment plans, having a student loan can help you build a long credit history. If you do have the opportunity to pay off your loans faster, you should still take it since there’s no reason to stay in debt for longer.
Negatives of Student Loan Impact on Credit Score
If you aren’t properly handling your repayments then student loans can wreak havoc on your credit score and you can get a negative student loan impact on credit score.
Since paying on time has a good impact on the score, paying late will have the opposite effect. In fact, paying late can be the most negative student loan impact on credit score. Getting behind on paying your loan will hurt your score as well as your credit history. Bad marks can stay on the report for seven years. Your student loan servicers can report the delinquency as early as 30 days after payment is due so don’t think you can just skip a month and it won’t have an impact. If you can’t afford to make your student loan payments, you may qualify for an income-driven repayment plan if you have federal loans. If you have private loans, you may be able to refinance for a lower monthly payment.
Defaulting Greatly Damages Score
Another negative student loan impact on credit score is an account in collections. This is even worse than a late payment. Accounts in the collection will stay on your credit score for seven years, just like late payments. These accounts stay on your credit report even after you pay them off. Creditors don’t want to lend you money unless you can be trusted to pay it back and defaulting will show creditors you can’t be trusted. Defaulting on student loans means that it can be harder to get credit for other things in the future. If you are worried that you may default, look at the options for refinancing and repayment plans.
Types of Student Loans
There are different types of loans for students. No matter which one you choose, the student loan impact on credit score will be similar.
Private loan can be hard to get if you don’t have a good credit score or someone with a good credit score who can co-sign your loan. A private lender will run a credit check to decide if you qualify. If your credit score passes but is still low then you will likely have to pay more in interest. A private student loan impact on credit score can be possible if you qualify.
You may not have a credit score when you are just starting out in life and a fed student loan can be a good option. You can get a federal loan without a credit check and it can have a positive student loan impact on credit score.
Personal Loans for Students
A higher education loan can be hard to pay back and you want to make sure your payments are on time so you don’t run into any trouble with your credit. Getting a well-paying job can be a good start to paying back loans but it’s not always a feasible option.
While it’s not always recommended to go into more debt, there can be more comfortable ways to pay back a loan besides just qualifying for a government repayment plan. This is where student personal installment loans come in as a way to give you more breathing room.
A personal loan can be helpful to students who are drowning in debt and aren’t able to make ends meet. Students don’t have that many lending options that are available to help them get out of debt. Credit cards can only make the matter worse and it can be frustrating to keep borrowing from friends and family. A personal loan for students can come with a lower interest rate that is more manageable. The lower rate can help you invest money in other projects that can help your income grow.
If you have already gotten into some bad borrowing habits and your credit is not that great then you can still get a personal loan for students. Some lenders may offer slightly higher interest rates if your credit isn’t that great and others will shorten the amount of time you need to repay the loan. Personal loans can be processed quickly, allowing you to have that money that you need. Personal loans don’t need any collateral, which makes them easier for students to get since the chances are likely students don’t have a lot to borrow against.
Here are some options for you, just put in your information, and you may get suggestions about a potential lender for you:
Should You Do Debt Consolidation for Student Loans?
A personal loan will allow you to do debt consolidation. This process allows you to take your accumulated debts and make one payment with hopefully a lower interest rate. It can help to start getting your debt under control after graduation and when payments for student loans begin.
Since you already know about the student loan impact on credit score, does debt consolidation also hurt your credit score? Determining if debt consolidation can hurt your credit score will depend on the different options you choose. When you first are selecting a loan for debt consolidation, you are applying for new credit, which means a hard inquiry on your credit report. Any time you do have a hard inquiry, your credit score can suffer.
While it initially seems that getting a loan for debt consolidation can hurt your credit score, adding new credit or a new loan can cause your utilization ratio to go up and this can actually help your score. However, for this to work, you need to not be acquiring any new debt.
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If your credit score is already in bad shape
In this specific case debt consolidation won’t really matter. If you don’t want the debt consolidation process to hurt your credit then you will need to consider all your options. The higher the amount of debt, the greater the impacts on the credit score. Even if you do see a slip in your credit score, the chances are the score is low enough that it doesn’t make much of an impact. Since a big part of your credit score is your payment history it’s still important to make payments on time every month, including your new loan for debt consolidation.
For debt consolidation to help with your student loans, the key is to not be taking on other debt. If you are running up credit card bills and getting into more debt then you could be in worse shape than before. You will need to think about your own individual situation so you know if the process can help you and your specific debt.
Is There Help for Student Loans?
Chances are if you are applying for college and are looking at how to afford it then you have heard of FAFSA. This stands for Free Application for Federal Student Aid. If you want to be considered for financial aid or even have a work-study job during your college years then you will need to fill out this form. The form will take your income and your family’s income into consideration. It will then determine your aid eligibility for loans or grants. Grants are financial aid you want since they won’t need to be repaid.
Even if you think your family earns enough money to prohibit you from qualifying for aid, it is still a good idea to complete the form. The form is needed if you are going to receive any scholarships and will also be needed if you want access to federal student loans. Even if you do have to take out student loans, and many people do, it helps to have the most options for paying for college. If you don’t fill out the form, you can miss out on student loans and scholarships, which you may have been eligible to receive.
There were two changes for the 2017 to 2018 school year. You are now encouraged to submit the form earlier. There is also a renewal option to complete the form that allows you to automatically transfer over data from year to year so you don’t have to start over each time you apply. You will need to upload your income data every year you are in school. The deadlines do matter so it’s important that you check deadlines at schools you are considering.
Understanding the 5Cs of Credit
Getting a loan approval can be dependent on your credit score but the credit score is only a portion of the decision on whether or not you are rejected or approved. Anything that can show the lenders whether you can repay will have an impact. A single item doesn’t determine your credit. Instead, it’s an equation with multiple factors that speak to the possibility and ability to repay the loan. These factors can be referred to as the five C’s of credit.
A person’s character can lead to decisions one makes, such as loaning money. Character is based on credit history. Your character is determined by your known financial actions. There is no way to see into the future about how your character can be so creditors go on past action.
A character can be judged more subjectively but capacity is straightforward. It’s the ability to repay. Lenders will look at income capacity to see whether or not you can repay the loan. If the outgoing money is more than your current income then you don’t have the capacity to pay the loan.
When you apply for a mortgage, a lender will want you to pay for a portion upfront. This can be low or it can be as high as the lender wants. This is also true with car loans. When you make a down payment, this is considered capital and it shows that you are serious about the purchase. You have some skin in the game and are invested in so you are more likely to pay off the loan and not lose your investment.
Collateral is slightly different than capital. In the loan world, this can be a check, piece of land, car title, or something else the lender sees as valuable enough to regain the money. Collateral can improve your chances of getting approved. Collateral is less of a financial risk for the lender.
Conditions are the conditions surrounding the loan. This can seem straightforward but there are conditions that can affect approval. A lender has to consider all conditions. Things like the interest rate and terms of the loan will also need to be factored in.
Establishing a Credit History
A student loan can have an impact on credit score, but what do you do if you are trying to establish credit history? Students and young adults often have this problem and it seems unfair that you have to have a good credit rating in order to pay for something as important as education. Credit isn’t just about credit cards anymore and there are ways to establish a credit history even if you don’t already have one.
Get a Credit Builder Loan
This is one of the easiest and painless ways so establish a credit history. This type of loan is one where you borrow a specific amount of money. The bank or credit union holds the money in an account you don’t have access to and you make monthly payments. When the amount is paid off you get the money minus any interest you needed to pay.
Many credit builder loans will be between $300 and $1000. It’s not about how much you can borrow but instead how much you can repay every month. You will need to be sure you can afford monthly payments before you begin the process. Otherwise, you can do damage to your credit score.
Build Credit with Parents’ Help
Your parents will likely have a credit card. You can ask to be an authorized user of your parent’s credit card. This means you won’t have a card of your own but can use theirs. You do need to check with the credit card company to see if they report any authorized users’ payments to them. If they don’t then this won’t work. Make payments on time each month. If you don’t, not only are you hurting your credit history but also your parents’. The biggest advantage of being an authorized user is that their credit history will also make yours look good. You don’t even really need to use the card.
Paying Your Bills
Some think that utilities, insurance, and rent are reported to credit bureaus. This is only true if you don’t pay. However, it’s still important to pay your bills in a timely manner. If you want credit bureaus to be notified of on-time payments then a third party reporting agency can be an option. You may have to pay for this service. But it can be worth it if you are trying to build up a credit history and do make all your payments on time.
Buying a Car
The first thing that many young adults buy is a car. If you make the monthly payments on time, you can establish credit history.
Almost nine of ten students get an education with the help of student loans. Depending on the loan, you may have a grace period before you have to begin making payments. Be sure to pay them on time every single month. There are different lending options for student loans and you may not have to go through Sallie Mae. Fees and rates can vary depending on different methods.
Build Credit with a Co-Signer
If you have someone in your life with good credit you can ask them to co-sign a personal loan in order to build credit history. The payments you make on the loan will then be reported to the credit bureau so you can establish credit. It’s important that you don’t default on the loan since your co-signer will then be responsible for paying it and both your credit scores will be negatively affected.
Stores will offer customers brand credit cards. If you spend a lot of money at these stores then chances are you can also be pretty good at paying your monthly credit card bill. The best way to handle a store card is to buy with it only what you would have bought with cash and pay the entire balance off each month.
No one will get a credit card before there is established credit history but you may be able to get a secured card. This is when you put between $200 and $300 in the bank and let it sit there for about a year. The credit union or bank can see this as collateral for a secured credit card. You aren’t able to make large purchases with a secured card. But when you make the payments on time each month, the credit union or bank may give you an unsecured credit card in a couple of years. Secured cards aren’t meant to be used long term and the purpose is to build or rebuild credit.
How to Increase Your Credit Score
Using student loans to your advantage and allowing the student loan impact on credit score to be positive can help you increase your credit score. There are also other ways to improve your credit score.
As it has been said time and time again, it’s extremely important to avoid late payments since this makes up such a big chunk of the credit score. If you aren’t able to remember your payments then sign up for automatic payments. If you can’t afford your payments then there are options you can consider, including debt consolidation.
Start paying down revolving debt first. Revolving debt includes credit cards. You want to keep credit card balances as low as possible and ideally at zero. Not only does this help with your credit but it also helps you avoid hefty interest fees. Pay off your debts to keep your credit utilization in check.
Since items like paying rent and other bills don’t help your credit score unless you are late, ask your landlord if you are able to pay for your rent on a credit card. Use the money that you would typically spend on rent and pay down the balance every month.
Be sure to review your credit report and check for any errors. Every year, you are entitled to one free credit report. Don’t miss this opportunity to check your score. Errors can be common and can be costly to your credit score. Review reports every year and then dispute anything that isn’t right.
When you are shopping for a loan…
When you are shopping for personal loans for debt consolidation, it’s important to rate shop and get the lowest interest rate possible. If you rate shop carefully then you can make sure it won’t damage your credit score.
The best way to do this is by keeping your loan applications within a 14-day time frame. This way credit reporting bureaus will understand you are loan shopping and it won’t damage your score.
Be sure to take care of any debt in collections. If a debt is in collections this doesn’t mean you don’t have to pay it off. Any account in collections can be very damaging to your credit score. An account in collections can stay on your credit report for seven years. Take care of these accounts as soon as you can. When it’s paid off, ask them to send a letter saying the debt is paid off to the credit reporting bureaus. Be sure to be diligent about this so you can get the marks off your credit report as soon as possible.
What Is a Travel Loan for Students?
For students who are looking to travel or spend a semester or year abroad studying a different culture, there are options instead of just taking on more student loans. Travel loans for students are just personal loans for students to pay for travel. These are separate from a federal student loans or private student loans. There can be plenty of reasons why a student wants to travel and it’s not just to study aboard.
Some students may also want to dedicate time to volunteer work or mission trips. Others may want to visit family during the holidays. Other students may also want to travel just for the experience before they settle down with a typical corporate job. Regardless of the reason, it helps to have the funds.
Travel loans for students can cover anything that is travel related, including plane tickets, luggage, food, lodging, and even souvenirs.
There are Pros and Cons of Using a Travel Loan and These will Depend on the Individual
This is a loan so it will have to be repaid and some may find it challenging to pay this loan back in addition to student loans they already have. As a young adult, debt can affect your future, depending on how you handle it. Just like the student loan impact on credit score, if you don’t pay back your student travel loan it can mess up your credit. As a young adult, you may have not had enough time to build up credit so you don’t want to mess it up before it even begins.
Your credit may have an impact on whether or not an employer will hire you. You don’t want to work hard toward your degree and not be able to get the job you want after graduation. You also don’t want to stay in a cycle of debt. And, between credit cards and travel loans, it can be difficult to stay afloat. Poor credit can mean irresponsibility and a lack of stability. And companies want people in certain positions that are responsible so this is why your credit score can affect your job opportunities.
Well financed student travel can also be a good way to establish credit
Especially if you make payments on time just like student loan impact on credit, it helps your overall credit score. Good credit can help you get a job and can help you purchase a home in the future. If you have the ability to repay the loan and can be committed to doing so then a student travel loan can be a great idea. However, if you feel that you may not be able to repay it then you may not be able to move forward with your plans.
When asking what is the student loan impact on credit score on my student loan, it helps to remember your specific situation. If you can pay your monthly payment on time and establish a good payment history then you can have a positive student loan impact on credit score. However, it’s easy to start having a negative student loan impact on credit score if you aren’t careful about making payments. For those having trouble making payments, debt consolidation can provide some relief.
There are ways to establish your credit for those who are just starting out. And ways to improve your credit score in the future. For students who want to travel, instead of taking out more student loans consider a travel loan for students.
Kevin Strauss is a personal finance writer and homeowner based in the Los Angeles area. Being in one of the most expensive markets in the country, he’s learned to maximize resources to plan for both his monthly expenses and future financial needs. Kevin has a passion for helping those in a similar situation navigate the complex world of personal finance so they can pay down debt, plan for the future and live out their dreams. In addition to covering personal finance in depth on Loanry.com, Cashry.com, Debtry.com, Budgetry.com, Billry.com, Creditry.com and Taxry.com. Kevin shares his expertise with readers who want to create budget-friendly habits across the web.