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How Do Student Loans Affect My Credit Reports and Credit Scores?

For better or worse, credit reports and credit scores affect many facets of our lives. Credit scores determine if you are able to buy a home, take out a car loan, obtain credit cards, or be eligible for student loans. For those of you who are still in college, it is also important to consider how your student loans affect your credit reports and credit scores. While those of you in school or who are college-bound may be familiar with these terms, you may not be aware of the ways in which student loans and student loan debt influence your credit ratings.

But what exactly are credit reports and credit scores?

A credit report or consumer report determines your credit worthiness, and includes personal information (your address, Social Security Number, date of birth, and place of employment), credit accounts (bank accounts, auto loans, mortgages, student loans, etc.), credit inquiries, and public record and collection agency items (i.e., overdue bills). Three major credit bureaus keep files of your credit reports and scores: (a) Equifax, (b) TransUnion, and (c) Experian. You can request to review documents of your credit score with each bureau at their respective websites.

A credit score is a number that determines a calculated assessment of your credit risk. Your number is judged against other people’s credit scores, and that score provides lenders information on how you will make payments in the future. Since it is based upon a mathematical formula, lenders rely heavily upon credit scores, believing that the assessment of credit risk is a precise snapshot of your credit history. That is why it is important for you to be familiar with the way in which your student loan debt affects your score. Although the formula is complex, there is something simple behind its calculation: if you have a lot of debt, your score will be lower. Clearly, that's not something that you want.

Now that you understand what goes behind a credit score, it is important to understand the score itself. A credit score usually falls between the ranges of 300 to 900. The higher your score is, the better. If you have a score of 720 or higher, you are going to receive better interest rates on credit cards, auto loans, and so forth. A good score can quickly plummet, however, if you fall behind on bills and miss payments.

Where do student loans fit into my credit score?

First, if you are shopping for private student loans rates, as long as you do so over a focused amount of time, such comparison searching will not hurt your credit score (that was not always the case). However, it is important to do a search on private loans before this first step.

Second, many people mistakenly believe that paying off their student loans quickly will only serve to help their credit score. In fact, if you pay off your student loans too quickly, or any debt for that matter, it will actually hurtyour score. Why? It’s simple: lenders earn capital by the interest on the loans they disperse to borrowers.

Based on this information, you might think that you should stick to the payment plan that your lender has provided you. Let’s say, for example, that you have a student loan through Sallie Mae and a repayment plan over a period of 10 years. That means paying it off within that time frame is fine, right? Wrong. This can also hurt your credit, because it suggests that you take too much time to pay off your debt. It sounds like a double-edged sword. Before you begin fretting about the way student loans affect your credit score, it is not as hopeless as it sounds. There is a balance that can be found that will ensure that your student loan debt will not hurt your credit score and credit report.

How can I manage my student debt and not hurt my credit score?

The obvious answer is to minimize your student loan debt before even beginning school. But if you are already a college student, there are other ways to ensure that your credit score will not be hurt by student loan debt. First, you can begin paying the interest on your loans before you even graduate. That may mean getting a part-time job. If you already have a job, ask your advisor or manager for extra hours. Finally, always make sure to work full-time (time permitting) during summer break. Once you have graduated, you can also take steps to protect your credit report. Often there is a grace period of 6 to 12 months after graduation. That allows recent grads the opportunity to find steady, full-time work. However, if you find a job before the grace period is over, make a point to open a savings account for your student loans and save up as much money as possible toward your loan payments during that period. That way, you will have money for your first few payments.

What happens if I miss payments on my loans or default?

It is imperative that you not miss student loan payments. Missing payments, as already mentioned above, will hurt your credit score. If you have a tendency to forget things, set up reminders in several places—your email account(s), your personal calendar, etc. Leave notes in handy places in your house, such as on your refrigerator or on your personal computer. Take all necessary steps to remind yourself of the dates for those payments. Do not, under any circumstances, default on your loans. Doing so will destroy your credit, and make it difficult, if not impossible, to rebuild your credit score. A student loan default will remain on your credit report for 7 years. Student lenders have tremendous power over borrowers, too. So defaulting can make it even harder to repay that loan, especially if your lender garnishes your wages. They even have the power to garnish disability checks and Social Security. That means you should do everything in your power to avoid that situation, including considering deferments, forbearance, and a different repayment schedule. If you are having difficulty paying your loans, get in touch with your lender and ask them to negotiate with you. If that does not work, reach out to family or friends. It might even require looking for additional work.

It is never too early to begin thinking about your financial future. All these tips will pay off, and help you avoid hurting your credit scores and credit reports. It requires planning ahead and outlining a well-drafted strategy. That will enable you to protect yourself from falling victim to bad credit.

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