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How Your Student Loans Affect Your Credit Score

10 July 2017 No Comment

Having a good credit score requires a good payment record, and you can’t have a payment record if you don’t have any loans or open credit on file. This means you have to have a loan or open credit cards in order to build a good credit score. However, a credit score is also important in order to get approved for a loan.

Such a dilemma is what makes first-time borrowers apprehensive of applying for a loan. Nevertheless, there is an easy way to get started, and that is through student loans. Moreover, it’s the best way to start building a good credit history. This is because a student loan is a good type of loan, you can have on your credit report.

Credit Score and Credit Report

A credit score and a credit report are two different things. They may affect each other most of the time but not all the time. A credit report is a collection of credit records submitted by lenders or credit agencies to three major credit bureaus – Transunion, Equifax, and Experian.

There are times that a credit report doesn’t affect a credit score. However, a credit score is always based on a credit report. When determining your capability to pay a loan, lenders will look at your credit score and not at your credit report.

How Does a Student Loan Affect Your Credit Score?

Although a student loan can easily help you get a good credit score, it will stay forever on your credit report. This is because a student loan isn’t entitled for bankruptcy, so it stays in your credit history in the case of loan default.

Nonetheless, there is a way to save your good credit score when you are temporarily unable to pay your loan. This is through either a loan deferral or a loan forbearance.

Take note that a loan deferral and forbearance are available only for federal loans. This means they are not available in private loans because they are only offered for public loans.

A loan deferral is offered for various reasons, but the loan is temporarily set on hold and if in the deferral process, then the interest is covered as well. If you don’t qualify for deferral on the options offered then you can take a forbearance; however, this option they will put the loan on hold, but you will incur interest payments as well during this period.

The good thing about applying for either loan deferral or loan forbearance is that you can have delays in payment without affecting your credit score because your loan will only appear as current in your credit report.

Since a student loan will stay on your credit report, it’s recommended you consolidate the loan(s) in order to reduce the interest. However, you should be alert in avoiding student loan consolidation scams as there are some companies that prey on people wishing to pay off their student loans.

Final Thoughts

Credit scores are very important not only for borrowers but also for lenders. For borrowers, a credit score will determine their success in getting approved for any future loan.

If you have an excellent credit score, your likelihood of getting approved for a loan is high. For lenders, a credit score will help them determine whether or not they are lending to the right person, and a great credit score will reduce their risk.

 

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