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.
You Might Also Like:
Until Next Time,
Jenny L. MaxeyAuthor of Barrister on a Budget: Investing in Law School…without Breaking the Bank