Stuart Johnson, Deseret News
Many people are curious, and often worried, about the effect that student loans will have on their credit score.
They wonder if taking out a student loan will help their credit, or hurt it, and to what degree will it influence overall creditworthiness.
The way that your federal student loans impact your credit is actually quite similar to the way any loan does. Just like any loan or line of credit, they can help your credit score when you make your payments on time — and they can hurt it, if you don’t.
The financial results of taking out a student loan can vary immensely, based on each individual’s situation. Plus, the exact equation that determines how your score is calculated is a closely guarded secret.
However, since these loans are subject to rules set forth by the federal government, which are exclusively applicable to them, there are a few unique ways your student loans can impact your credit.
Here are nine little-known facts about how these particular loans impact your credit score.
1. Putting your loan in deferment/forbearance doesn’t hurt your credit. In fact, some banks will lend more easily to you if you can demonstrate that you qualify for these repayment assistance options.
Most bank loans don’t offer extended measures of assistance, such as forbearance or deferments, which can last up to a year at a time. Because of this, some borrowers worry that using repayment assistance, such as forbearance, could hurt their credit scores during the time they are not making payments.
This is not the case since payments are not required. In fact, there are circumstances where forbearance and deferment can positively impact your chances of getting a loan.
For example, if you can show your bank that you will be in forbearance, they may take that into consideration when determining whether you have enough discretionary income to pay back the loan.
So if you need to take advantage of forbearance, rest easy — it will not negatively affect your credit.
2. Student loans report as installment loans, which usually have less impact on your credit score than revolving credit.
Student loans are usually treated as installment loans by the credit bureaus. Installment loans are not as heavily weighted in your credit score as revolving credit is, such as credit cards.
According to Experian, a global credit information group, properly managing your credit card balances is a strong indicator that you are disciplined and responsible with your debt. Proper debt management is great evidence that shows how you’re in control of how much money you borrow, within your credit limit.
3. Student loans are a great way to establish credit history.
Many students in college do not have the luxury of a long, outstanding credit history, to help them get credit when they finish school. It can be difficult to qualify for credit cards and loans without a significant credit history to rely upon, especially if you have not yet secured a job.
Student loans serve a wonderful purpose in this regard. You don’t need to have credit to qualify for federal student loans.
4. Student loans can boost your credit by adding an installment loan to your credit resume.
One of the factors that go into the way your credit score is calculated is the diversity in the types of credit that you carry.
As Experian's website explains, the more types of credit that you have, the higher your credit score will be, provided you pay on time.
5. Student loans are considered “good credit.”
- Mark Zuckerberg is taking two months...
- Since '01, Clintons collected $35M from...
- Dave Ramsey says: Include minor car repairs...
- 5 ways you drive away millennial employees
- U.S. is the richest country, but Americans...
- Former NuSkin executive trades boardroom for...
- My view: Bring back the blacksmith: A case...
- Michelle Singletary: Living on campus is a...