With student loan debt now at record levels in the U.S., it’s time we take a look at the question of what student loans do to your credit score.
If you’re one of the millions of college graduates now carrying student loan debt, this is a real concern. After four (or more) years of higher education, no one wants to enter the working world feeling like they’re in a credit hole.
Let’s clear up a few things about student loan debt and how it affects your credit score:
1. Multiple loans can work to your advantage
Student loans are seldom a single loan.Rather they are a bundle of loans reported to credit bureaus as you receive them. For that reason, they show up on a credit report as multiple smaller loans.
Assuming you make the payments on time, this means each of these loans is being paid back regularly – earning you a higher credit score over time despite having multiple loans.
2. Installment loans have a minimal impact on your credit
Student loan debt is considered an installment loan, unlike credit card debt, which is a revolving loan.
The difference? Credit rating bureaus view installment loans as less of an impact on your credit score than a revolving loan balance. In fact, a student loan of $25,000 may not impact your credit score as much as a credit card debt of $10,000.
One reason for this is payments are generally fixed at a certain amount each month for a student loan, while credit card payments can vary and interest rates can rise rapidly.
3. Loan diversity can help your score
Student loan debt can actually improve your credit score under some circumstances. That’s because your FICO score is based partly on the diversity of your credit.
If you have credit cards as your only form of credit, it won’t reflect as highly as if you have a blend of credit types. In this way, a student loan (remember it’s an installment loan, not revolving credit) can help to balance out your credit mix and result in a higher overall score.
4. Deferments and forbearance have zero impact
As with any loan, it’s important to make the installment payments on your student loan debt on time each month.
If something happens and it looks like you won’t be able to continue making payments on your student loan debt, consider filing for a deferment or forbearance rather than simply defaulting on your loan.
A deferment or a forbearance of your student loan debt will actually not negatively impact your credit score.
Credit rating agencies treat student loan debts (no matter how daunting the amount) no differently than other forms of installment loan debt. In fact, your student loan debt can actually help you build good credit if you’re diligent about paying it down.
Use the credit that was extended to you and begin building a good credit score and good credit habits.
Photo credits: Flickr/Tulane Public Relations; i.imgflip.com; payload.cargocollective.com; Flickr/Chris Potter; www.borrowwisely.org