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We hear about establishing good credit
or see the commercials about checking your score on a regular basis, but what
does it mean? A credit score is a number
based on several aspects of your individual financial history. This number is used by lenders to determine
approval of a loan and the interest rate – a high score can sometimes get you a
lower interest rate. But lenders aren’t
the only ones who may review your credit history. Sometimes employers, leasing agencies for
apartments or cars, or even your character and fitness review for bar admission
can include a credit score report to determine your reliability and ability to
manage debt.
But when do your student loans factor
into your credit score? Technically, as
soon as you are granted them. Debt
diversity adds 10% to your score, and student loan debt is different than other
forms of debt. Student loan debt also
increases the time span of your credit history, which accounts for 15% of your
total score.
Your score isn’t truly affected until
you begin making payments or when your payments become due. This sounds like the same thing, but it’s not. While you are in school, during your grace
period or in a deferment or forbearance your score will be unaffected. This is because there is no payment history
to report. However, new lenders can
still consider your student loan debt when deciding whether or not you are a
good candidate for a loan.
35% of your score depends on your
payment history. Therefore, making
student loan payments on time can positively affect your credit score. But, due to the varying repayment plans, the
amount of the payment can change your score in other ways. 30% of your score is based on the total
amount owed to lenders. Therefore, if
you are making interest-only payments or interest plus payments towards the
balance, then your score will be affected positively because the amount owed is
staying the same or is going down.
However, if you are on a repayment plan that doesn’t meet the full
interest and your outstanding balance grows, even though your payments are on
time (which keeps that portion of your score positive), your score may be
affected negatively for the part based on amount owed.
The most obvious way to affect your
score is by missing payments, making late payments, or going into default on
your student loans. These will damage
your score and a default will damage your score significantly. Therefore, it is very important to work with
your lenders to make manageable payment plans that you can keep up with in a
timely manner. Reports typically span
over seven years, so even a blemish on your payment history can take a long
time to correct.
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Until
Next Time,
Jenny
L. Maxey
Author of Barrister on a Budget:
Investing in Law School…without Breaking the Bank
1 comment:
A very good and informative article indeed . It helps me a lot to enhance my knowledge, I really like the way the writer presented his views. I hope to see more informative and useful articles in future.
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