Yes, student loans can help build credit. Making on-time payments on your student loans can lay the foundation for building a strong credit history. This is one of the first ways that many individuals get started with building credit. But student loans can also hurt your credit if you’re not careful. If you’re wondering how do student loans help build credit, here’s what you should know. But first, it’s important to know what factors affect credit scores.
There are five main factors that go into calculating your credit score:
You know which factors affect your credit score. Now here’s a look at how your student loans have a positive effect on your credit score.
1. Student loans give you an opportunity to build your score with timely payments – Payment history has the single biggest impact on your credit score. This includes payment history on loans as well as credit cards. As a student your lines of credit are limited. You may or may not have a student credit card. But you’re sure to have student loans. Making on-time payments on your student loans is the fastest way to build credit.
2. Student loans add to the length of your credit history – The earlier you get a line of credit, the more years you can add to the length of your credit history. A longer average age of credit accounts could add points to your score. Your loan account history starts from the time your loan funds are disbursed. This is even if you start making payments only after the grace period, which is six months after graduation.
3. Student loans add to your credit mix – Even if you have a credit card as a college student, it still counts as one type of credit account. As we said earlier, lenders like to see a mix of credit accounts. Your student loans add diversity to your credit accounts. This will help add points to your score.
Yes, unfortunately, student loans can hurt your credit. Missed payments and late payments do the most damage to your credit score. Even one missed payment on your student loan will knock a few points off your score. This stays on your credit report for up to 7 years. Prospective lenders will be reluctant to approve you for a loan when they see this entry.
Here are a few ways to use your student loans to build a good credit score:
Making all payments in full and on time is the fastest way to use your student loans to build credit. Just staying on top of your student loan repayments is enough to build your score.
If you miss payments because you keep forgetting the deadline, consider setting up auto-pay. With auto-pay, the loan payments are deducted from your bank account and transferred directly to the lender on the set date. You don’t have to keep track of due dates. Missing payments can hit your credit score hard. Do whatever it takes to make sure that all those payments go out on time.
You know the importance of paying student loans on time and in full but what if you just can’t afford the payments? If you find the monthly payments unaffordable, consider switching your loans to an income-based repayment plan. You can only do this with federal student loans. Income-based repayments are designed to make payments more affordable and lower your risk of defaulting on your loan.
The amount you owe on student loans compared to the loan balance can also affect your credit score. The smaller your loan balance, the better. Try and pay down as much of your student loans as you can as quickly as you can. As you pay down the debt, the lower balance can help boost your scores.
Managing multiple loans can get overwhelming. It also increases your chances of missing payment deadlines. Refinancing allows you to combine multiple loans into one loan so you make only one payment a month instead of several. Keeping your payments on track will help in your credit-building endeavor.
And if you qualify for a lower interest rate, you’ll save a lot of money too when you refinance your student loans.
We hoped you enjoyed this article! Remember, you canand potentially lower your monthly student loan payments and save money.