Understanding how student loans affect your credit score will help you make informed decisions that will protect your credit history. It can even help you build a strong credit score.
A bad credit score makes it very difficult to get approved for any loans in the future. And those few lenders who are willing to loan you money will charge you premium interest on the loan. On the other hand, a good score makes it easier to get approved for loans and at a lower interest too.
Take a look at the ways student loans can affect your credit score.
There are four major ways that student loans can affect your credit score:
- Monthly payments
- Default and delinquency
- Hard credit checks
- and Credit history
Monthly Payments Can Build or Damage Your Credit Score
Your monthly payments will have a major impact on your credit history. Make all of your payments on time and in full and you will be able to build a solid history that will make it easier for you to get cheaper loans in the future.
On the other hand, late payments will affect your credit score negatively. Even one late payment can reduce your credit score by a few points. If you miss payments more than once, this can damage your credit considerably.
If you are struggling to make your monthly payments in full and on time, you should explore other repayment options that will allow you to meet your monthly loan payments punctually.
Another option: defer your loans. Student loan deferment does not affect your credit score.
Delinquency and Default Will Damage Your Credit Score
Piggybacking off of the late payments point, both student loan delinquency and (especially) student loan default can negatively impact your credit score. Loan servicers talk with national credit bureaus, and will report your missing payment status.
Hard Credit Inquiries Can Reduce Your Credit Score
When you apply for a private student loan, the lender will find check your credit to determine your creditworthiness and to set an interest rate on your loan. This credit check is known as a hard check or hard pull. Every hard check that is done affects your credit score negatively and remains on your report for 2 years.
One way to avoid multiple hard credit inquiries is to apply for a private loan through lenders that first do a soft inquiry first in order to give you an estimated interest rate. The hard inquiry is done only after you’ve confirmed that you would like to go ahead with processing the loan application. This helps keep your hard credit inquiries to a minimum.
Taking Out a Student Loan Increases the Length of Your Credit History
Several different factors go into making up your credit score. Your credit history accounts for 15% of your total score. The longer you’ve had credit, the higher your score will be.
If you’ve never taken any loans before, it can actually be to your advantage to take out student loans. This will helps add to your credit history, which in turn will build your score as you are likely to be in repayment for at least 10 years.