A student loan definitely affects your credit score, but not necessarily in the way you think. If you become regular with your student loan payments, your credit score will get a positive boost. But, if you default on loan payments or make frequent late payments, then your credit score may get a major blow.
How student loans harm your credit score if you default on payments
Having a student loan will positively affect your credit score. In fact, if you make on-time payments, student loans will help your credit score grow in several ways. But, on the other hand, it'll do the exact opposite if you fail to make payments or make late payments towards a student loan.
1 As per FICO, your payment logs make up to 35% of the credit score. So, if you are consistently making late payments over a long period, or fail to pay at all, I'm afraid, this will be noted in your credit report and gradually your score will also get reduced.
2 Diversity in credit accounts makes your credit score strong. It'll make up to 10% of your score. So, if you are constantly paying off your other debts (like your mortgage and credit cards), but getting late every time when it comes to student loans, it's not a good thing for your credit score.
3 Maintaining a good payment history in student loan can boost 15% of your score. So, if you default by any chance, the option to push up your score by 15% is going to be nil.
What are student loan deferments and forbearances?
A student loan deferment will allow you to stop student loan payments for a certain period of time. The reasons behind this favor may be specific, like bad financial condition - such as returning to school, financial hardship, or sudden loss of a job.
This time, your lender allows you to hold your payments temporarily or to a specific amount or he can reduce the payments.
The student loan will be treated as being “paid as agreed”. However, as student loan is subject to rules and regulations prepared by the federal laws and there are a few unique ways it can impact your credit score.
Here are 9 facts about how this particular loan impacts your credit score:
1 As mentioned earlier, getting a deferment or forbearance in your student loan doesn’t impact your score. In fact, some lenders will agree to provide more financial support easily if they know that you are already qualified for these repayment assistance options.
2 Student loans are considered as instalment loans. That's why they have less impact on your credit as compared to credit card debts.
3 Student loans are a good option to build the credit history.
4 Student loans can charge up your credit by increasing the diversity of your credit account. It'll add an instalment loan to your credit profile directly.
5 Everywhere, student loans are taken as “good credit.” It’s because you’re taking the loan for educational purpose, not to spend the money on luxury, extravagant things.
6 Paying off the student loan debt before the loan term may damage your credit score more than you can imagine.
7 Federal student loan lenders basically rectify the delinquency reporting in credit report automatically once the deferment is approved and updated.
8 Most of the federal student loan providers allow you nearly 2 months to make your payments. They’ll not report the past dues to the credit bureaus until you’re 60 days behind of your payment at the end of the month.
9 As soon as you resolve your student loan delinquency, your credit score will start growing immediately.