How Student Loans Affect Credit Scores
source site (Dallas, TX – National Credit Solutions) It’s a fear that most recent grads have: how will my thousands of dollars in student loans affect my credit score?
The fact is, student loans are loans: they can be beneficial to your credit score if you pay them off on time, or they can be harmful if you don’t.
According to FICO, a student loan is treated like an installment loan (mortgage or car note). The good news is that most credit bureaus treat installment loans differently than revolving credit; they look more at your revolving credit (such as how you pay off your credit card bills) than at your installment loans.
The second piece of good news is that student loan deference of forbearance will not hurt your credit score. Deferment or forbearance allow you to put your student loans on hold, whether because you lost a job or suffered another economic hardship. You can defer these payments anywhere from a couple months to a couple of years without damaging your credit score.
Many people are under the impression that student loans can only harm their credit score. This is far from true, however, as student loans help you establish credit history – an essential step in building good credit. Your credit scores can actually improve because of your student loans, as you now have an installment loan on your credit resume, and this adds to the diversity of your credit history. The more types of credit you have, the better your score will be (provided you pay off your debts on time).
Some people may decide they want to pay their student loan off as quick as possible, so they don’t have that weight hanging over them. There are so many resources on loan forgiveness for students who are in this position. However, you do need to think about your loan in a positive way. Although you may have accrued thousands of dollars in student loans, remember that you used this money as an investment in your future. Instead of stacking up debt with superfluous credit card charges, you built up a “good” type of debt. While your credit score does not reflect this “good credit”, individual banks often take this into consideration when deciding whether or not to give you a loan. Since you took out these loans for a productive purpose, most banks view student loans in a positive light.
So despite what most people assume, student loans can actually help your credit score. As long as you make your payments on time (unless, of course, you need to defer your loans for a short period of time), your credit will thank you for taking out those student loans and furthering your education. Not only can pursuing higher education give you a leg up in the job market, but it can also give your credit score a helpful boost that will help you down the road.