When It Comes to Student Loans and Credit Scores, Know 10 Things, by 720 Credit Score
When it comes to student loans and credit scores, there are ten facts you need to know…
But before we get to that, let’s talk a little bit about student loans. These loans are “unsecured loans,” meaning that there is no collateral backing them. Whereas your car can be repossessed if you do not pay your car loan on time, no one can take away your education!
That said, as with any other loan, your credit score will drop if you are late or skip a student loan payment; it will increase when you pay your student loans on time.
Making payments on student loans offer a great opportunity for young adults to begin building their credit score. If lenders see that you can make payments on time and in full, your credit score will go up and you will be more likely to get larger loans in the future.
This is important because you will need credit upon graduating from college. Your first employer might run a credit check, assuming that your credit score is a good indication of whether you are responsible or not. And a landlord will definitely run your credit before renting a home to you.
With all this in mind, here are the first five things you should know about student loans and credit. (And if you already have student loans, be sure to watch this video for more facts that will help you manage your payments.)
Student Loans and Credit, Fact #1:
In 2001, 31 percent of college graduates were living at home. That number grew to 45 percent by 2013.
Why?
Because it’s harder than ever to find a job, so before you take out an endless stream of student loan debts, remember that the economy might not allow for you to repay your student loan debt.
Student Loans and Credit, Fact #2:
Before you leave college, avail yourself of the opportunity to receive exit counseling, a service most schools offer to prepare their students to repay federal student loans. This counseling can provide you valuable information about your rights and responsibilities and the terms and conditions of your loans. You will learn about things like “income-based payments,” which allow you to base your student loan payments on your income.
Student Loans and Credit, Fact #3:
If you cannot make a payment, ask for forbearance, a short-term agreement that allows you to make smaller payments, or no payments at all. Otherwise, you will harm your credit score. Keep in mind that if you do not make payments, interest will continue to accrue and the amount due will grow larger.
Student Loans and Credit, Fact #4:
When you apply for a student loan, your credit might or might not be pulled. Some lenders do require a credit score, but others do not. If your credit score is pulled, a credit inquiry will be added to your credit report. This might cause your score to drop, but the impact will be minimal.
Student Loans and Credit, Fact #5:
With this in mind, consider that students who are positioned to pay back their loans before graduating will enjoy a faster ride to good credit. Even though a lot of student loans do not require repayment until you have graduated, your credit score might be higher if you start repaying the loans immediately. Keep in mind that some employers will run a credit check when you apply for your first post-college job, so having a high credit score could behoove you.
Some people have speculated that if borrowers pay back their student loans too fast, they will lose credit points (presumably because the maximum interest on the loan will not be accrued if the loan is paid off early). I think this is a bogus claim. Credit-scoring bureaus are not interested with your creditor’s ability to earn the most interest, but rather with your ability to repay your loan on time. The bureaus want to know that you will pay your debts on time. Paying your student loans sooner rather than later is a wise thing to do because your debt-to-principal ratio will drop and your score should increase.
Stay tuned. In my next post, I’ll share five more things…
