This blog post was written as part of a sponsored program for ConsumerInfo.com, Inc., an Experian Company. All views expressed are entirely my own and were not influenced or directed by Experian. This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Several years ago, credit was as vague to me as quantum theory. I wasn’t sure how it worked, why it mattered, and how it impacted me.
Now that I’ve decided to learn all there is about personal finance, I’ve learned a lot about how credit works.
Credit illustrates your ability to borrow money and pay it back on time. Your creditworthiness is illustrated by your credit score, which is a numeric average that helps lenders determine if you’re legit — what’s the likelihood you’ll actually be paying your loan back? Throughout the past few years, I’ve learned some interesting things about how student loans can affect your credit score and thought I’d share with you.
Credit can sometimes be used as a bad word in personal finance, but in actuality, if used correctly, can be a very good thing. Having a diverse credit mix with different types of loans can actually help your credit score, as it shows you are a responsible borrower.
A student loan, which is an installment loan, can add to your credit history. If you make consistent, on-time payments, this will reflect positively on your credit score. For me, having a student loan was what actually put my credit score on the map.
As some of you may know, I didn’t get my first credit card until two years ago when I was 28 years old. In other words, I didn’t have any other credit aside from my student loan. Due to my positive repayment history, I’ve maintained a Good to Excellent credit score throughout my adult life. While student loan debt is no fun, it can help build your credit if you make on-time payments.
Lee Siegel made headlines this year with his story of defaulting on his student loans and pretty much encouraged others to do the same.
The article made me cringe as it didn’t discuss in detail just how dire defaulting actually is and how it affects your financial life. Not only can your wages be garnished by the government, but your credit score will tank and your loans could be put into collections, getting charged even more fees on top of your loans.
Not a pretty picture. If you have student loans, it’s important to make the minimum payments each month. If that’s too much, talk to your lender immediately. Defaulting on your student loans can seriously hurt your credit score, which is a surefire way to cause trouble for yourself down the line.
Your credit score can help you rent an apartment, apply for a credit card, car loan and more. If your credit score is low, doing these things may be difficult.
Want to know something interesting? A few weeks ago, I got a notification from an app that one of my credit accounts had closed and my credit score changed. Paranoid and uncertain, I swiftly logged into my account. While I was typing in the password, I was scanning my mind. “Did I close a credit card? I don’t even know what this is for – what happened?”
In actuality, I had paid off one of my student loans (yay!). Technically, your student loans are a type of credit account and because one of my credit accounts was now closed, my credit score went down a little. Why? Because I don’t have that much revolving credit history (with my credit card) and this was now a change in my credit mix (i.e. my types of loans — installment, which is my student loans and revolving, which is my credit cards).
My credit score only went down a few points, so it was nothing to worry about, but still a surprise nonetheless. In the end, paying off debt is a good step in your repayment history and will ultimately reflect positively on your credit score.
As you can see, your student loans can affect your credit score in a variety of ways. Did anything surprise you? Do you have any other questions on how student loans can affect your credit score?