Many student borrowers are not sure about how their educational loans will ultimately affect their credit score. Are these loans just like any other, or is their impact somehow different?
The answer is, it's a little bit of both.
On one hand, the effect of your student loans is very similar to any other institutional loan. Pay on time, and your credit score goes up. Don't pay on time, and your credit profile will suffer. On the other hand, federal student loans in particular come with their own set of rules, and they thus can impact to your credit profile in their own specific way.
Below are four facts about how student loans impact your credit score that you probably don't know about:
1. Deferment and forbearance doesn’t hurt your credit.
If you plan on furthering your education or if it will take some time before you are able to secure a good paying job, then chances are you will opt for either a loan deferment or forbearance. Don't worry, this will not hurt your credit since payments will not be required during this period.
2. Student loans are recorded as installment loans, and that's good for your credit.
As a student, it can be harder to build up much of a credit history. By paying back your student loans each month you will actually be improving your credit score making it easier to get approved for a bank loan or an unsecured credit card. This is due to the fact that student loans are recorded as installment loans by the three major credit bureaus: Experian, TransUnion and Equifax. When you regularly make payments to your student loans each month, it serves as “ evidence ” that you can responsibly manage your debt.
3. Paying your student loan off early won't help your credit.
While sending in extra payments each month can save you a great deal of interest, if you choose to pay the loan off early, you won't help your credit. In fact, you may actually end up lowering your score. When it comes to revolving credit, such as credit cards, the lower your outstanding balance, the better your credit score. It shows you are keeping your debt manageable. But with installment loans, it is not possible to increase the debt you owe. Plus, your monthly payments are consistent each month. While your credit history will show that you have paid off the loan, its effect on your score is weaker because it will no longer be considered an active loan.
4. Don't worry if you're account is a few days past due.
The majority of the lenders that offer federal loans will not send a report to the credit bureaus for a past due account until 60 days have passed. So, if you are unable to make your payment on time, don't worry. Even if you are a few weeks late, it will not likely have an impact on your credit score.
In short, student loans are not much different than any other loan or line of credit out there. While you may have a bit more leniency when it comes to making payments, if you approach your loans responsibly and make the effort to stay current each month, it will only help your credit score.