With over 1 trillion dollars of debt shared between millions of Americans, student loan debt is among the most common type of borrowed money you’ll find in the country.
This isn’t particularly surprising. After all, many student loans are taken on by people who just turned 18 on the promise of it being positive debt that will pay for itself in the future.
That may end up being true for some. But what if you have difficulty paying back that debt?
Will it affect your credit? Your opportunities?
And what about if you make payments on time? How would that affect your credit?
Our team at Credit Repair Answers has put together this article to educate consumers more on student debt, credit, and student loans credit score implications.
What are Student Loans?
Just to nail some definitions down, let’s quickly go over student loans. Student loans are money students would borrow either from the government or a private lender to attend a higher learning institution.
Student loans can be acquired for any degree type including an Associates, Bachelors, Masters, Doctorate, and Juris Doctorate.
Student loans can also be acquired for trade school certifications for those interested in jobs like an electrician or plumber.
How Does Paying Back a Student Loan Work?
Once approved for a student loan amount through your lending institution, paying back can work in a number of ways depending on the loan type. For example, some loans offered through the government are deferred interest loans.
With these loans, interest doesn’t start being charged to the principal loan value until after you graduate and have to start making payments. These are typically offered to students pursuing their first degree who represent a certain level of financial need.
Another loan type offered by the government as well as private lending institutions are standard loans. These loans begin to charge interest on the borrowed amount the moment the money is lent.
Some will still let you defer payments until after you graduate but that does not stop the interest from accruing. Depending on the amount borrowed and how long you’re in school, the amount of extra money you’ll need to pay as interest compounds on your loan can be immense.
A Little Bit About Credit
Credit is virtual commodity lenders use to judge how likely you are to act responsibly with money in the future. Credit is integral to your getting approved for quality future loan products such as a car loan, mortgage, and more.
Credit may also be a factor in deducing your eligibility for things like a particular apartment.
Typically, credit scores fluctuate based on a variety of factors. The most important two being the duration of your credit history (how long you’ve been actively borrowing money in some way, shape, or form) and your history with paying back your debt in a timely fashion.
Student Loans Credit Score Implications: How Do Student Loans Affect Your Credit?
Student loans are considered installment loans which get treated a little differently by FICA (the organization responsible for coming up with your primary credit score). This is in contrast to the way credit cards get treated, as they’re categorized as revolving debt.
With installment loans, you can carry a high loan amount and not get penalized for borrowing large amounts in the same way you would be if say, you borrowed a massive amount from your credit card.
Will Student Loans Hurt Your Credit?
Student loans are only likely to harm your credit if you’re not making payments on time and in full. FICA says that borrower’s on-time payment history accounts for over 1/3 of their credit score.
That means something as small as a single missed payment can cause big-time problems with your credit.
On a side note, given the amount of money borrowed on your student loan, having one could prevent you from getting other loan products. Some lenders look at your debt to income ratio to determine if they can lend you more. With $50,000 or so in student debt on your books, getting more money might be hard to get approved.
Will Student Loans Help Your Credit?
Carrying loans responsibly can significantly improve your credit. For starters, the longer you have a loan, the longer your credit history. The longer your credit history, the more your credit score goes up.
Also, every payment you make on time for your student loans gives lenders more confidence that you’re responsible with your money. So the more you pay back, the more lenders and your credit score will love you.
How to Repair Your Credit
If your credit has suffered as a result of not being able to handle your student loans, there are ways to bounce back.
For starters, if your monthly payment is too high, contact your lender and see if they will restructure your debt. It’s possible that they can make your monthly payments lower and extend the life of the loan.
Also, know that as you do catch up with payments and start paying on time, your credit will start trending in a positive direction. Credit is a very fluid rating so the second you start proving you can pay back what you borrowed is when you’ll start to notice your credit recovering.
Wrapping Up Student Loans and Credit
Student loans credit score implications can be scary for those who don’t know much about finances. Taking the time to educate yourself by reading articles like this will help you better understand how credit ratings and student loans relate to one another and will set you up for success in your financial future!
If you’re interested in learning more about all things credit, dig deeper into Credit Repair Answers. We offer a slew of free financial advice which works to answer all of the money questions plaguing your life!