Student Loan Debt and Your Credit Scores
Credit scores are the key to buying a home, getting a car loan, getting a credit card and being eligible for some student loans. It’s crucial that you understand how student loans can impact your credit scores.
What is a Credit Score?
It is all about mathematical risk! If you have a lot of debt, your credit score will be lower and lower is not better. A credit score, which usually ranges from a 300 to a 900, is a number that determines if you are a good credit risk. Your number is judged against other people’s credit score and that score is provided to creditors in a credit report. That score providers lenders information on how you will make payments in the future.
The score will also determine the interest rate you are offered on a loan. If your score is 720 of higher you’ll get a better interest rate. But if you fall behind on your student loan payments or default, your credit will plummet!
What is a Credit Report?
A credit report is like a report card that determines your credit worthiness. It has personal information like your address, date of birth Social Security number, bank accounts, loans, credit inquires and collection activity. The 3 major credit bureaus are Equifax, Transunion and Experian and you can request a copy of your credit score at their websites.
Student Loans and Your Credit Score
While we don’t recommend private student loans, your credit score or your parent’s credit score will determine if you are offered a loan and the interest rate you are offered.
A Federal student or private loan impact your credit score just like any loan. If you make your payments on time, that will help your credit scores. If you don’t make your payments on time of if you default on your student loans, your credit scores will suffer! There are x ways a student loan will improve your credit score:
1. Student Loans can help you establish a credit history
It can be difficult to qualify for credit credits or loans without a credit history and student loans are a great way to develop a credit history.
2. Student loans are treated as installment loans
The more types of credit you have, the higher your credit score. A student loan is treated as an installment loan and provides diversity in the types of credit you carry.
3. Student loans are “good credit”
When a bank looks at your credit history, they look for diversity and what you’ve borrowed the money to purchase. The bank has the discretion to give you a loan and to set the interest rate. Education is an investment in you and your future and banks like student loans.
What happens to my credit rating if I miss payments on my loans or default?
Missing a student loan payment can hurt your credit score. While many federal student loan lenders won’t report your account past due to the credit bureaus until your account in 60 days past due, the simple advise is don’t let a month go without making your payment.
If you don’t make a payment for 60 days the delinquency will show up on your credit report. Paying your past due student loan will improve your credit scores.
Getting behind in a student loan can lead to default and a world of problems. There are options for delinquent federal student loan borrowers and you should take advantage of those options.
A student loan default will remain on your credit report for 7 years. Worse yet, there are immediate consequences for your default which include garnishment of your wages, seizure of your IRS refund, reduction of Social Security benefits and loss of future financial aid.
What happens to my credit rating if I put my loan in deferment or forbearance?
Remember there is no deferment or forbearance for private loans!
Deferment or forbearance options are available for Federal student loan borrowers but the use of these tools require a strategic decision and planning because there are better options. Those options involve income based repayment plans, student loan forgiveness programs and even student loan discharge programs.
Why you should talk to a student loan lawyer if you are having trouble making your payment
You don’t want to be the victim of credit or jeopardize your financial future because you can’t pay your student loans. Contacting a student loan lawyer can help you understand your student loan options and how you can get a fresh financial start. A defaulted student loan will stay on your credit report for 7 years.