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.”
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.
Understanding your credit history has never been more important. Not only does your credit score affect your ability to benefit from financing, it also plays a large role in your ability to get a job, since it’s common practice for employers to check the credit history of their applicants before hiring.
If your credit score and history has suffered as result of your student loans, rest assured that there are tangible steps you can take to improve it, within a reasonable time period. Information is available through student loan finance experts, websites and community forums.
Jan Miller is a student loan consultant & founder of Miller Student Loan Consulting, a company that creates customized student loan repayment plans that fit each borrower's unique budget & life. EMAIL: firstname.lastname@example.org
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