We all know that furthering your education can be expensive. Even with generous grants and scholarships, it's not often that a student can complete a degree without having to take out some sort of student loan. Although these loans provide an amazing opportunity for students without huge college funds to attend college and increase their future earning potential, they can also get a young adult into financial trouble before they've even begun their lives.
It's easy to forget that student loans are a form of debt and as such, they do have an impact on your credit score. Whether that impact is positive or negative depends mainly on how you deal with your student loans.
Your credit score is extremely important, especially when you are just starting out. It can determine your financial future and a bad credit score can make it harder to find housing, get a car loan and even find a job.
A credit score is determined by several factors:
Payment history – Your payment history makes up about 35% of your credit score. If you pay your bills on time, you'll have a good start here. Keep in mind that if you only have one or two lines of credit (including student loans) even one late payment can bring your score down.
Amount of debt – How much debt you have makes up 30% of your score. Although you need to carry some debt, in general this number should be low.
How long you've had credit – Having an established credit history can certainly score you some points. In fact, how long you've had credit in your name makes up 15% of your score.
New accounts you've recently opened – To determine your credit score, how many recent credit applications you've submitted is also taken into consideration. This makes up 10% of your score.
The types of credit you have – If you have an auto loan, a credit card, a personal loan or a student loan, this is all used to come up with 10% of your score. The more diverse your credit history, the better your score will be.
For many people, a student loan is the first credit account they have. As a result, their credit score is based primarily on just those accounts. This means that it's extremely important to start off paying your student loan on time. By using these loans as an opportunity to establish good credit at the beginning, it will be easier to obtain a car loan and a credit card in the future which will give you a more diverse credit background.
However, if you don't make your student loan payments, it can really damage your credit score for the rest of your life. In worst case scenarios, people can file for bankruptcy and have their most outstanding debt discharged – except for things like student loans. In fact, unlike credit cards and other lines of credit, there is no way to get out from under student loan debt – aside from paying it off. If that wasn't bad enough, if you default on your student loans, they will stay on your credit report for a long time.
If you find that you are unable to pay your student loans, it's best to contact your lender and ask about your options. Often, there are things that you can do to defer payments or consolidate your loans. It's always better to work out something with your lender than to default on your loans.
Have student loans had an impact on your credit? Please share your thoughts in the comments.
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