One complex debate that has existed in the education system is whether student loans are still serving the role they were set out for. In this debate, a common question is often, ‘how do student loans affect credit score?’ To effectively respond, we must look at the different dimensions of such loans as well as their historical purpose.
The United States federal loan system was established with the goal of increasing social mobility and investing in the nation’s future. This objective was to be achieved by making sure that people without the means of affording higher education were given government assistance to enable them to attend college. During the first many years of the program, student loans served as a crucial stepping stone to guarantee the economic future of students.
However, over the recent years, having to pay back student loans has proved to be undeniably frustrating with the most common impact being damaged credit scores. While paying your loans on time can actually boost your credit, most students have found themselves unable to access important financial facilities like loans and mortgages. This article explores the very important question—does student loans affect your credit?
How Do Student Loans Affect Credit Scoring?
There are many ways in which your student loans can affect your credit scores. The first type of impact is negative, particularly if you do not handle your payments well. Here are some ways in which poor management of student loans can harm your credit:
- Late payment negatively affects your score
Maintaining a good credit score is a delicate undertaking, and require making sure that your payments are made on time. Your payment history, if dotted with non-payments or delayed remittances, can hurt your student loans credit score. Such negative marks remain on your report for seven years. If you are able, always pay on time. In case you find yourself struggling to make payments, check with your loan service provider if you can work out an improved income-driven plan. Refinancing is also an option if you need to lower your monthly remittances and improve the terms.
- Defaulting on loans greatly damage your score
In general, late payments are bad for your credit scores. However, defaulting on remittances altogether can irreparably damage your credit standing for seven years, once you actually get to pay them off. Other creditors will be hesitant to lend you money if they cannot be sure that you will pay it back. Defaulting is a clear indicator that you cannot be trusted. In turn, you will face a hard time getting financing for other things later in life, including mortgages, and car loans.
- Cosigners can also be affected
An interesting area in the relationship between student loans and credit score relates to cosigners. Failing to make payments as agreed affect not only the borrower but also impacts the credit standing of the cosigner. This individual agreed to repay the debt in the event that you are unable to pay. Cosigners must put themselves aside of such possibilities before consenting to the arrangement.
Does Paying Student Loans Help Credit Grow?
When looking at the various ways in which student loans affect credit score is important to look at negative as well as positive aspects of the debate.The precise impact is dependent on the borrower’s repayment practices. In general, student loans have prolonged repayment periods, and to some extent, your credit score can benefit from the long credit history. However, to realize such benefits, you need to make sure that your remittances for each month are made on time. There is actually some good that comes with student loans in relation to your credit. But, do student loans build credit? Yes, it does, and here is how:
- The prolonged repayment period means a long credit history
A history of paying your debts on is actually good for your credit score. In fact, up to 15 percent of the score relies on how long you have been taking and paying back loans. Since student loans often come with a long repayment period of between 10 and 15 years, they can help in this regard. Of course, there is the option of paying your loans faster, which can save you some crucial cash that comes with accumulating interest rates. Impacting 15 percent of your credit rating is not a good enough reason to remain in debt for too long.
- Punctual repayment boosts your scores
Another element in the positive loans credit relationship relates solely to making payments on time. However, it is important to note that many things that borrowers make payment on, including car insurance and rent, are never reported to the credit bureaus until one stops paying. Student loans are quite different in this regard. Remittances on student loans can allow the borrower top build up an ever important payment history.
- Student loans positively affect credit mix
Credit mix refers to an assortment of the types of credit used. While it is of less impact on your credit score compared to history and on-time payments, the mix still counts. If you have different forms of credit, including mortgages, credit cards, auto loans, and student loans, the better your report.
- The prompt resolution of delinquency can immediately boost your score
An important element of addressing the ‘do student loans build credit’ question is looking at the possible impact of delinquency and default. We acknowledge that, while resolving delinquency can be challenging, it is good for building your rating. It is, however, best to avoid becoming delinquent in the first place.
When Do Student Loans Show Up on Credit Report?
Student loans appear on the borrower’s credit report and are factored into the credit score, just like other loans. As soon as you accept the loan, you are inadvertently opening an account with the lender, meaning that they can start reporting on that account at any moment. The entries will indicate whether it is in repayment or deferred. Even when your loans are transferred to or purchased by new lenders, the old ones will still appear on the report, although showing that they have been transferred. The important thing is to make sure that you manage your loans effectively to prevent them having a negative impact on your credit standing.
In this article, we have explored the important question—do student loans build credit or harm it? Well, it all depends on how you manage the repayment process. If you pay your debts as agreed, the loans can actually strengthen your score.