9 ways student loans impact your credit score

By Jan Miller

For the Deseret News

Published: Wednesday, March 13 2013 11:10 a.m. MDT

In other words, the money you are borrowing is going to be used for educational expenses, as an investment in your future — not for extravagant, luxury items that can potentially be purchased on a credit card.

This may not have a large impact on your credit score, but it may play a role in a bank’s discretion when determining whether or not to give you a loan.

6. Paying your student loan off early may hurt your credit more than it helps.

Making extra payments on your student loans can save you interest costs over the life of your loans, but paying the loan off early could potentially lower your credit score.

With revolving credit, the lower you keep your balance, the better it looks to creditors. This factors into your credit score, as well.

However, with installment loans, there is no additional risk of potential debt, or available credit, and your monthly payment will always be the same. Additionally, if you pay off your debt early, the lender may see this as a missed opportunity to cash in on interest charges.

As a result, your credit score doesn’t usually improve when you pay extra on any of your installment loans. Additionally, your score can actually decrease once the loan is paid off, provided it is the only installment loan you have. This happens because you were benefiting from having more than one type of credit.

Although your paid-off installment loan history still remains in your credit history, it is no longer an active loan, and figures into the scoring differently. Just as adding an installment can help your credit, paying it off can hurt you.

7. Federal student loan lenders usually correct delinquency reporting automatically when any deferment is backdated.

According to finaid.org, a financial aid services guide, if your credit has suffered because your account went delinquent during a time period when you would have qualified for deferment, most lenders of federal student loans will automatically correct the derogatory credit reporting, once the deferment is approved and backdated.

For example, let’s say you went back to school, but forgot to mail in the deferment form. As a result, your account went past due. Once you send in the deferment form, you can backdate the request to the original date you qualified.

In most cases, the lender will then fix your credit, to reflect that backdated deferment period, and it will then be removed from your history.

8. Many federal loan lenders will not report your account past due to the credit bureaus until your account is 60 days past due at the end of the month.

If you account goes a few days or weeks past due, don’t panic: It is unlikely that this will lower your credit score.

Though the lender’s credit-reporting policy is up to them, you will still likely be able to avoid any blemishes on your report, even if you miss one payment.

Make sure you get your payment in as fast as you can — it is easier to get dinged for your credit than it is to have bad credit removed.

9. Resolving your student loan delinquency can immediately raise your credit score.

Even though legitimate delinquency will remain on your credit report, bringing your past-due student loan account current will reflect positively on your credit history and raise your score.

Sometimes you can see your credit score increase as soon as a few weeks after you bring the account current. And, in many instances, student loans have repayment assistance that will allow you to bring your account current without even having to make a payment.

Creditkarma.com, an online source for obtaining credit data, said there are usually friendly options for delinquent federal student loan borrowers.

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