The Relationship Between Student Loans and Credit

What’s the relationship between student loans and credit scores? You may be surprised! In this article, we review the nine things you should know about student loans so that you can build a great credit score.

First just a little background. Student loans are unsecured loans (with no collateral backing them) issued to help with the costs of tuition, books, board, and various other school-related expenses. As with every other loan, your credit score is deeply influenced by your student loan. Whenever you make your student loan payments promptly, your credit score will improve. If your payments are late or should you skip a payment, your score will drop.
Student loans are a good way for young adults to commence the all-important task of showing lenders they can handle debt. If lenders see that you can make payments on time full, your credit score will go up and you will be very likely to get larger loans down the road.This is very important as you will need credit after graduating from college. Your first employer might run a credit check, assuming that your credit history is a good indication of whether you're responsible or not. A new landlord is sure to run your credit before renting a residence to you. With all this in your mind, allow me to share nine things you ought to know about student loans and credit.

Student Loans and Credit, Fact #1:
If you apply for a student loan, your credit may or may not be pulled. Some lenders require a credit score, but others do not. If your credit score is pulled, a credit inquiry is going to be added to your credit report. This will likely cause your score to drop, but the impact will likely be minimal.

Student Loans and Credit, Fact #2:
About 30 percent of your credit score is determined by your outstanding debt: the ratio of how much you owe versus the amount you've paid. The more you've paid and the less you owe, the greater your score. If your payments are deferred until you have graduated, or if you have deferred payments for another reason, the ratio isn't going to be in your favor, and your score might decrease. Nevertheless, it will eventually start to improve after about 6 months of making payments in time.

Student Loans and Credit, Fact #3:
With this in mind, take into account that students who are positioned to repay their loans before graduating will enjoy a faster journey to good credit. Even if a lot of student loans do not require repayment until you have graduated, your credit score might be higher if you start paying off the loans right away. Keep in mind that some employers will run a credit check when you apply for your first post-college job, so developing a high credit score could benefit you.Many people have speculated that if borrowers pay off their student loans too fast, they'll lose credit points (presumably because the maximum interest on the loan won't be accrued if the loan is paid off early). I think this is a bogus claim. The actual details of the credit-scoring formula haven't been released, so I cannot unquestionably confirm this theory one way or another, but I seriously doubt its accuracy. Credit-scoring bureaus are not interested with your creditor’s ability to earn the most interest, but rather with your ability to repay the loan on time. The bureaus need to know that you're going to pay your debts on time. Paying your student loans sooner rather than later is a wise move to make because your debt-to-principal ratio will drop plus your score should increase.

Student Loans and Credit, Fact #4:
Before leaving college, explore the chance to obtain exit counseling, a service most academic institutions offer to prepare their students to repay federal student loans. This counseling can grant you worthwhile information about your rights and responsibilities and the terms and conditions of the loans.

Student Loans and Credit, Fact #5:
Once you begin repaying the loan, never forget a payment. Here’s something you might not know about student loans and credit: 35 percent of your total credit score will be drawn from your payment history on credit cards and loans.

Student Loans and Credit, Fact #6:
If you can't make a payment, request a forbearance, a short-term agreement that allows you to make smaller payments, or no payments at all. Otherwise, you will harm your credit score. Keep in mind that if you do not make payments, interest will continue to accrue and the amount due will grow larger.

Student Loans and Credit, Fact #7:
Keep in touch with your lender. If you are struggling with your payments, never wait until the lender approaches you or until a delinquency notice is logged on your record. Instead, initiate communication with your lender. Talk about forbearance or student loan consolidation.

Student Loans and Credit, Fact #8:
Student loans can never be dismissed during bankruptcy.

Student Loans and Credit, Fact #9:
Making regular payments on your student loans is a great opportunity for young adults to start developing their credit score, setting the building blocks for better loan terms and lower interest rates on potential loans, and saving bundles over the course of a lifetime. But this isn’t enough. As you move ahead after school, you should try to add in different types of credit into your finances while keeping current on the payments. The mix of credit you have comprises 10 percent of your score. The credit scoring bureaus want to see that you can handle a variety of types of loans-from credit cards to student loans to car loans.
Now that you are aware of the nine important facts about student loans and credit, be sure to find out the 38 facts the banks don’t want you to know! These money-saving tips and close-guarded strategies about credit scores will save you a bundle and help you position yourself for success.

Learn more about how to fix bad credit and create a high credit score at Phil's site dedicated to giving the facts about credit scoring and personal finance.