Effect of Student Loans on Credit Score
After viewing the staggering figures of student credit loans reaching $1.56 trillion in 2020, a practical individual just can’t help but wonder how much student loan will affect his/her credit score. We all understand that a student loan is installment solvency, and therefore like every other loan, they directly affect our credit score. Both loan and credit score are directly related to one another hence their operational direction is in our hands.
Clearly, we understand the primary aspect of this relationship. Still, the question arises that does student loans have only a positive impact on your score, or can they impose any adverse effects? After analyzing the direct impact on credit score, understand if credit scores can impact your student loans? You don’t have to look for valid answers anywhere; instead, read the information given below to understand all the ifs and buts of this correlation.
In-Depth Analysis of Student Loans and Credit Score Correlation
To understand student loans’ effect, you need first to understand the primary aspects of credit score. So let’s begin by reckoning what comprises a credit score. These financial debt tabs are nothing but a large portion/proposition of your loan repayment history. It is an account that mirrors your first impression to the lender, and based on this; they formulate your image of whether or not you are a safe borrower.
These reports comprise 35% of your total score and contain figures about how regularly/irregularly you paid the installments over the due course of your loan. These payment histories then serve as a piece of evidence to determine how sincere you are as a borrower.
As student loans fall under the category of installment loans alongside asset loans, its tab does reflect on the individual’s payment history. They fall under the category of loans that affect 35% of your total score, and any late/missed payment does stay put a time span of seven to ten years.
Can Paying Student Loans Build Credit Score?
Similar to every other loan, timely repayment of student credit does positively reflect on credit score over time. The benefit might be minuscule, but every aspect that doesn’t harm your credit score is worth noting. As stated above, loan payment history comprises 35% of your credit account. Therefore paying loan installments in a timely manner reflects positively on your accounts. Apart from payment history, two other factors forge your accounts into what they are today.
- Credit mix is one of the fundamental factors that constitutes 10% of the total credit score. This mix presents positive imagery in front of lenders and ensures that you have a healthy mix of credit lines. To put it in simple words, it means that the unique line of credit you own, the better will be your score. Therefore it is advised that you create a portfolio that is a blend of a variety of credit profiles, and as soon as your profile is considerably varied, your credit score will elevate.
- Length of credit history is the second factor that plays a vital role in your credit score. Credit length and credit age are two distinct aspects where the latter means, on average, how long have all your accounts remained open. Credit age does contribute to the length of credit history. Student loans usually come with a 10-year repayment plan, and timely repayment is bound to increase your credit score. Length of credit history similar to credit mix constitutes 10% of your credit score. So, as long as your student account is open and you don’t default payment or commit delinquency, your score is most likely to see a positive impact.
The best thing about positive credit reports is that they stay on record for more than ten years after being closed. In other words, if you’ve paid your student loans on time throughout the 10-year repayment span, it’s going to mirror a fantastic effect on your credit score in the future. Ably handling credit procedures from an early age not only reflects well on your credit score but also speaks volumes about your personality.
How Can Student Loans Hurt Credit?
As discussed above, student loans can be beneficial for your credit score. But the question arises that can these loans hurt your credit score? Yes, it can, and let’s see how.
We reckoned that paying our installments on time constructs a very reliable image for us then if you miss a payment, the effect will deteriorate your picture. The payment history of student loans stays on your credit report; hence, lenders will refrain from approving your loan if you have a poor record. These consequences of defaulting on a loan can be avoided if you cover the tracks of your missed payment soon.
The reporting time frame solely depends on how early you fix the situation and the type of student loan you have acquired. Suppose you have funded your education from a traditional banking entity in the form of a federal loan. In that case, they report the problems to the three major bureaus (Equifax, Experian, and TransUnion) after 90 days of default. On the other hand, if you have taken a loan from a private lender, they usually wait for 30 days, or the payment failure is reported to the federal bureaus.
Another reason that can degrade your credit score is if you apply for a loan from an untrustworthy private organization. They will conduct a hard pull on your credit report that will spoil your credit process. The last factor that can harm your credit score is borrowing an amount more than needed. As you are a new player in the market, it will increase your debt to income ratio, which ultimately will cause your score to go down.
If you wish to understand more on similar lines or are looking for institutions that can help you repair your credit score, contact Atlanta Credit Experts. They will provide you with out-of-the-box options for personal and business funding with proper guidance to avoid every potential financial obstacle that might hamper your success in the future.