Do student loans affect credit score

Student loans make it easier for aspiring students to pursue education without worrying about finances right away. They operate as installment loans only – just like a home loan or car loan. You pay back the principal amount with the interest accrued over a certain period of time. Once the entire loan amount is paid in full, the account is closed.

Student loans can affect your credit score just as much as other loans and one wrong mistake can make it difficult for you to get approved for new lines of credit. Let's take a look at how student loans affect credit scores and the best ways to avoid it from happening.

A student loan is specially designed to help students pay for their college or other higher education. The loan amount can cover tuition fees, supplies, books, and even accommodation.

Since the interest does not start accruing over the principal amount until you have officially graduated and passed out, it gives students enough time to start looking for a job before they have to make monthly repayments.

Your debt-to-income and debt-to-credit ratios can get impacted by student loans. The debt to income ratio is the total amount of debt that you owe, divided by your income. If you were to apply for a new loan on top of your student loan, the lender would also assess your debt-to-income ratio to understand whether you can pay off the loans or not.

Your debt-to-credit ratio is the total amount of credit available to you. Lenders usually prefer individuals with lower debt-to-credit ratios. It essentially means that your credit utilisation should be low.

More importantly, your student loan will appear on your credit report even before you start paying for it. When you apply for a new line of credit, lenders will consider your student loan debt when evaluating your creditworthiness and overall likelihood of repaying back the debt.

That is why, if possible, students are encouraged to start paying off their loans before they graduate in order to decrease the accrued interest amount.

To avoid your student loan from affecting your credit history, it's also important to understand your payment plans and the minimum monthly payments required to avoid late fees.

Since many people take out student loans before they have even built a good credit history, student loans can help boost their credit scores.

Here are some of the benefits:

Good credit mix: Credit mix refers to the different types of credit accounts under your name like loans, credit cards, mortgages, and more. It's an important factor for calculating your credit score as it tells lenders how well you can handle different types of credit. Taking out student loans can create a good credit mix and improve your credit score.

Good payment history: Making timely payments month after month creates a good payment history in the long run. By paying off your student loan installments on time, you can build an optimum payment history and increase your credit score for future credit applications.

Build a long-term and sustainable credit history: Many students have a zero credit score or no credit score when they graduate, which can make it difficult for them to get approved for new credit products or get a lowered interest rate. With a student loan, you can build a good credit history easily and improve your credit score as well.

Long wait before seeing an increase: Since you don’t start paying off student loans until after you graduate, it can also take some time to see the impact of timely payments on your credit score. That means you shouldn’t expect to see a good credit score right when you graduate. It will at least take 6-8 months of timely payments and good credit history to see an increase in your score.

Credit inquiries: Every time you apply for a new line of credit, a hard credit inquiry is generated by the lender to check your credit report. These credit inquiries get listed on your report and too many credit inquiries can lead to a decrease in your credit score. When you apply for multiple student financing loans or personal student loans with the hopes of getting approved for one, it can lead to multiple inquiries, which can in turn affect your credit score.

Before you apply for any new credit product, make sure to check credit score in order to understand where you stand and avoid getting rejections.

Delayed payments can cause problems: Student loans are, at the end of the day, just another type of installment loan. You pay them on time and everything stays okay. But when you start missing payments, delays can reflect on your credit score. Missing too many consecutive payments can also lead to loan default and leave a long-lasting impact on your credit report.

Paying off loan installments on time is one of the main factors that can directly boost your credit score. When you start paying off your student loans month after month, it can improve your payment history and slowly build your credit.

Though it's important to note that, it can take anywhere between 6-12 months of timely loan repayments to build up your credit history. At the same time, if a parent has co-signed the loan with you, repayments will also affect their credit score.

There can be uncertainty about paying off student loans, especially if you are struggling to get a job right out of college. You may not be making enough money to pay off monthly repayments or you may be thinking about the next step of your career.

In situations like these, it's better to look for solutions instead of missing out on your repayments. Here are some options that you can take up:

• Reach out to your lender about a revised payment plan to lower your monthly repayment amount
• Explore options to refinance or consolidate your loans in order to decrease the interest rate
• Look for any government forbearance or deferment opportunities to pause monthly payments

Student loans are crucial for many students to pursue higher education. As a result, there are many lenders offering low-interest rate loans with benefits to students. While applying for student loans can affect your credit score for a short while, paying off your loans on time will help ensure that you are able to steadily build your credit.