Before young adults have time to build up a good credit portfolio, they are already weighted down with student loan debt. Unlike credit cards or conventional loans, credit worthiness is not a requirement when it comes to getting a student loan. Whether you already have your own accumulation of student loan debt or you are curious about future student loans, the way they affect your credit is similar to any other type of loan or line of credit.
If you have no other credit lines open, then your student loans help build your credit history. As long as you make payments on time, they have a positive effect on your credit building. Additionally, they add a new type of debt to your credit report if you already have a credit card or two. The diversification in debt types is a good thing for your credit score.
Installment Loan Reporting
When your lenders report your student loans to the credit bureaus, they fall under the installment loan debt type. This means student loan impacts on your credit score are not as high as credit cards.
Deferment and Forbearance
When you have trouble paying your student loans, or when you enroll in school at least part-time, the loans can have a deferment or forbearance status and in either case you do not have to make payments on the loan. While you might think this reflects poorly on you, it actually has no effect on your credit score.
Early Payoff Effects
Paying off your student loans can be a good move from the perspective of interest saved. However, doing so can actually lower your credit score if this is the only installment loan debt on your credit report. If you have an auto loan or mortgage that is still open, then you likely will not take a credit score hit by paying the loan off early.
If you get in your deferment paperwork late, then your credit report may already list a late payment on the student loan. Having a delinquent account is not good for your credit score. Unlike other lenders, the student loan lenders backdate your deferment, which keeps your credit report clean. As a result, it is possible to see the negative mark on your credit report before it gets corrected. When this happens, there is no damage to your credit score.
Past Due Reporting
While you will not experience this with other types of debt, student loan lenders generally do not report late payments to the credit bureaus until you are 60 days late. This means being a few days or weeks late on your student loan will not adversely affect your credit score.
Resolving A Delinquency
When you get behind on your student loans, it gets reported to the credit bureaus as a delinquent account. This lowers your credit score, but you can rebound in just a few weeks as soon as you catch up. Often, a student loan payment status updates to “current” without you even making a payment when you utilize available repayment assistance.
These seven examples demonstrate the way you manage your student loan payments can affect your credit score in sometimes-unexpected ways. Be sure to keep up with changes in how your credit is scored and treat your student loans like any other debt.
Do you have any questions about your student loans? We would love to hear from you.