How Student Loans Affect Your Credit

If you’ve graduated from college with student loans, it could be impacting a lot of your day-to-day life: whether or not you have to live at home with your parents, how much you can spend going out with your friends on the weekend, and even what kind of job you take.

One thing that your loans impact but that might not be top of mind? Your credit score. Whether or not you’re aware of it on a daily basis, your student loans have a huge impact on your credit score. Both your debt balance and your repayment could impact your credit history – and therefore the rest of your financial life.

Here’s how student loans affect your credit:

Student loan deferral or forbearance won’t damage your credit score, but missed payments will. If you sign up for deferral or forbearance, you’re essentially postponing when you have to start repaying your student loans. Even though you’re not actively paying down your outstanding debt, delaying your payments won’t hurt your credit. But if you decide to postpone your payments and you haven’t signed up for deferral or forbearance, you’re simply missing your payments – and that could really hurt your credit. Since your payment history has the biggest impact on your credit score, even just one missed student loan payment could hurt your credit.

The more you owe, the more it harms your score. The total amount of money you owe ,the greater your outstanding student loan balance, the worse off your credit score will be. Your total debt also impacts your ability to take out a loan, beyond just affecting your credit score. If you’re shopping for a mortgage, for example, your loan officer will assess your debt-to-income ratio. The higher your ratio (or the more debt you owe related to your income), the less likely you’ll be approved for a loan.

If you pay off your student loans completely, your credit score will go down… but not by a lot. Two smaller factors that impact your credit score are the length of your credit history and your credit diversity. If you have a credit card and student loans, you’re considered to have more credit diversity than someone with just a credit card who has paid off their student loans. Similarly, if your student loan was one of the first lines of credit you ever had to your name and you pay off that loan, that line of credit is considered closed.

That’s two strikes against paying off your student loans early, right? Not necessarily. Since your credit diversity and the length of your credit history have such a small impact on your credit score in comparison to your payments and your total debt, it’s still smart to pay off your debt quickly. It’s generally always worth paying down your outstanding debt as soon as possible, even if it means a small dip in your score when those loans are paid off.

For any assistance contact us at www.cibilconsultants.com

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