The impact of student loans on your credit rating
Written by: Sarah Miller for Student Choice
We recently talked about how your credit (or lack thereof) can affect your eligibility for student loans. But there’s another important way student loans and credit are tied to one another. Once your student loans go into repayment, the way you handle those payments can have an impact on your credit score – for better or for worse.
When you make payments on just about any type of loan, it’s reflected on your credit report. Student loans are no different, and according to FICO® (the credit score people) traditional student loans (the ones you have to apply for every year – such as Federal Direct loans) are treated the same as any other installment loan.
From Wikipedia: An installment loan is a loan that is repaid over time with a set number of scheduled payments.
Your Student Choice loans through any of hundreds of credit unions nationwide will appear slightly differently on your credit report due to their unique line-of-credit structure. This line-of-credit structure is actually what allows you to avoid applying for a new loan every year, and simply take a “draw” or request additional funds when needed. (helpful hint – think of installment as meaning multiple loans – one each year for school. Think of line-of-credit as “keeping the tab running” like the available credit line on your credit card – apply once for all the funds you need long-term).
From Wikipedia: A line of credit is any credit source extended to … an individual by a financial institution. It allows the [user] to pay for goods and services based on the holder’s promise to pay for them. The issuer… grants a line of credit to the consumer from which the user can borrow money for payment for services.
With both types of loans, if you’re making payments regularly and on time, it will have a positive impact on your credit score. And that means when it comes time to borrow money for other reasons – a new car, your first home, etc. – you’ll could potentially receive a better, lower interest rate. That lower interest rate means less money out of your pocket over time. Additionally, paying on your student loans will help you establish credit history at a time when you may not have much built up yet.
Any time you fail to make timely payments or default on a loan – meaning you stop making payments entirely – it will lower your credit score and hurt your chances of receiving loans in the future. If you are having trouble making ends meet and truly can’t make your payments on your student loan, look into options for deferment or an income-based payment plan. Deferment means that you could get some time off from making payments if you meet certain qualifications. But beware, your interest could continue to add up, so you’re really just postponing the inevitable.
A Cautionary Tale
How does all of this shake out in real life? Here’s an example:
A friend – let’s call him “Joe” – owed several thousands of dollars in student loans when he left college. He’d made payments, but after a while wasn’t making enough money to continue – so he just stopped. Joe’s lender started calling. He told them he’d make payments. He didn’t hold up his end of the deal. They called more. Joe stopped answering. A few years later he applied for a mortgage loan and was told he didn’t qualify due to negative credit reporting on his student loans. The mortgage lender suggested he pay off the delinquent amount on his loans and come back in six months to see if they could help him then.
The moral of this story is that when you accept a student loan, you’re accepting responsibility to repay it. If you play by the rules and pay on time – great! You’ll see benefits in the form of a higher credit score. If you don’t hold up your end you’ll pay the price in one way or another, and that’s a college lesson no one wants to learn!
Learn more about how different types of loans affect your credit score from Forbes.com.
Remember, if you have questions, a great place to start is scheduling a financial check up with your local credit union. Find one near you by clicking below.