Do Student Loans affect Your Credit Score?
Do student loans affect your credit score?- There’s always a great influence on an individual’s credit score with the student loan and borrowers must understand this relationship. Credit scores serve as a numerical representation of one’s creditworthiness, which lenders utilize to assess the likelihood of debt repayment. In a study conducted by the credit scoring agency FICO, it was found that 63% of individuals with student loans did not observe any improvement in their credit score within a year, while 15% experienced a decrease of 40 points. A mere 22% witnessed a 40-point increase.
Student loan debt is becoming almost common in different countries. According to the Student Loan Report, approximately 70 per cent of college students in 2018 had student loans, with an average debt of $27,975 per borrower. I’m not going to delve deeper into the statistics; the most important topic to discuss is the impact these loans have on every student (borrower), including the potentially surprising outcome of repaying a loan.
Student Loans and Credit Score:
A student loan, or any loan, directly affects your credit score depending on the amount of the loan, the terms of the loan, and the payments made.
The good news is that when you are taking out student loans, increases your credit score, at least in the short term. The reason is that the Fair Isaac Corporation (FICO, the most widely used credit scoring provider in the US) is believed to view instalment loans more favourably than revolving debt.
So, the expectation on your loan as a student is that the balance starts high and is paid down to zero, while credit card debt starts at zero, then increases, and fluctuates. All student loans, whether they are private or federal, are treated the same on your credit score.
Credit Benefits of Student Loans.
Whether a student loan helps you or not, largely depends on whether you make payments in full, on time or every time. Payment history accounts for 35 per cent of your FICO score. While one or two late payments won’t destroy your credit beyond repair, but they can cause a noticeable drop. A single late payment could sincerely lower your credit score by up to 100 points.
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If it’s managed properly, student loans can be advantageous in helping you build your credit history. We’re not telling you to use this as a strategy to improve your credit score; what we are saying is that if you need financial assistance to attend school and are responsible with payment, student loans are not the credit killers you might be thinking.
Your credit score itself can be a little confusing to dissect, but the concept of building credit is pretty simple: Lenders like it when students (borrowers) have a history of making on-time payments, which leads to other lenders approving their loans. This leads to an increase in credit, also, having student loans along with other types of loans, such as a car or mortgage loan, could have a positive effect on your credit mix. On a credit report, the credit mix represents the different types of accounts the consumer has opened. Credit mix only makes up 10 per cent of your FICO score, a much smaller portion than payment history, but still notable.
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It is necessary to develop a master plan for your credit management to protect yourself against any negative impact of student loans on your credit. Creating a budget that incorporates loan payments allows for prioritization and allocation of resources accordingly. Exploring options like loan forgiveness programs or refinancing can provide relief and enhance the manageability of loan repayment.
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