If you were to play a word-association game using the phrase, “student loans,” what are the first few words that would come to mind? When I think of my debt load, my words are, “frustration,” “annoyance,” and “the worst.”
But when I consider my student loans in general, the phrases are, “educational funding,” “opportunity,” and “credit-building.”
Believe it or not, student loans aren’t all bad. If you feel that you’re about to be consumed with rage or sadness over them, remember this one fact: Done right, they can help you build credit.
Do student loans affect credit?
Regardless of the type of loan you have, all student loans represent money that has been lent to you and affect your credit.
If you’re handling your student loans well by making minimum payments every month, that can build a positive credit history. In turn, that means you can pay less for other life goals you might have, such as buying a home or getting a car loan.
Your credit report and credit score are both positively and negatively affected by your student loans, depending on how you’re handling repayment. This includes parents of college students who use Parent PLUS loans.
When you’re making on-time payments, your credit score goes up. When you skip payments, you get negative marks on your report, lowering your overall score.
Let’s dive into the how and why student loans affect your credit score.
Positive effects of student loans
There is some good that comes with student loans. When you pay them on time and make at least the minimum payments, you build your credit score with a positive credit history. Here are a few good ways student loans can help you.
1. Paying on time influences 35 percent of your score
Your payment history makes up 35 percent of your credit score. However, many things you make payments on, such as rent or car insurance, are never reported to the credit bureaus — until you stop paying them.
Although some payments aren’t reported to credit bureaus, student loan payments are an exception. These payments can help you establish and build up your ever-important payment history.
If you don’t have a credit card or an auto loan in your name, then paying student loans on time is a great way to start building credit from a young age. But even parents with Parent PLUS Loans for their college-age kids can build up their scores.
2. Having loans makes it easier to build a credit mix
Credit mix, or the type of credit used, is less impactful on your credit score. This factor affects 10 percent of it. Credit mix simply refers to the mixture of credit you have: credit cards, mortgages, auto loans, and others. The more variety you have, the better it looks on your report.
If you already have a credit card or auto loan, having student loans gives you a credit mix. Remember that credit used is only 10 percent of your overall score, so you don’t need to put too much stock in credit diversification.
3. A long repayment period means a long credit history
Length of credit history influences 15 percent of your credit score. Since student loans often come with 10-year payment plans, having them will help you build a long credit history.
Of course, if you have an opportunity to pay off your loans faster, you should take it. Affecting 15 percent of your credit score isn’t enough of a reason to stay in debt for longer.
Negative effects of student loans
If you aren’t handling your repayments well, student loans can devastate your credit. Here are a couple ways poor student loan management can harm your credit.
1. Paying late will also influence 35 percent of your score
While paying on time will be a huge help to your score, paying late will have the most negative impact. Payment history can hurt you as much as it helps you. That’s why it shows up in both our pro and con list.
Paying your student loans late hurts your score and your credit history. Bad marks stay on your report for seven years. Your servicers can report your delinquency as early as 30 days after your payment is due, so don’t think you can skip a month without any fallout.
If you can control it, never pay anything late. If you have federal loans but can’t afford to make your student loan payments, see if you qualify for an income-driven repayment plan.
If you have private student loans and need to lower your monthly payments, try to refinance them for more favorable terms.
2. Defaulting on your loans will greatly damage your score
Late payments and delinquencies are bad for your credit, but accounts in collection are worse.
Like late payments, accounts in collection stay on your credit report for seven years, even if you eventually pay them off. But they represent a lot more to lenders than just late payments; they represent lost revenue. If a lender has to sell a defaulted account to a collection agency, it does so for pennies on the dollar.
Creditors won’t want to lend you money unless they can trust you to pay it back. Your credit score and credit history show whether you can manage debt responsibly. And defaulting shows creditors they can’t trust you.
Going into default on your student loans will damage your credit score and make it more difficult to obtain credit for other things for years to come.
If you fear you’re getting to that point, consider the same options stated above: IDR plans for federal loans and refinancing for private student loans.
How do Parent Plus Loans affect your credit
Parents looking to help their college-age children afford school can take out Parent PLUS Loans. Parents who take out this type of loan are required to repay it.
Here’s what parents should know about how these loans impact their credit.
1. Do Parent PLUS Loans affect the student’s credit?
Although a Parent PLUS Loan is taken out to help cover a child’s college costs, the debt only affects the parent. That’s because only the parent’s name appears on the loan.
But parents can transfer the responsibility of repayment onto their children by refinancing Parent PLUS Loans. If the student agrees to take on the debt and is approved for a loan, they’ll be on the hook for repayment.
2. Do Parent PLUS Loans show up on credit reports?
Federal loans show up on credit reports. This includes Parent PLUS Loans.
3. How do Parent PLUS Loans affect your credit score?
If your payments on a Parent PLUS Loan are showing up on your credit report, you can be sure they’re also affecting your credit score.
As with other types of debt, on-time and full payments positively influence your credit history; payments that are late or for less than the minimum don’t reflect well on you. Further, Parent PLUS Loans add to your credit mix and can help build a long credit history.
Keep your student loans in good standing
As long as you stay current on your payments, student loans will help your credit score. By contributing to your payment history, credit mix, and length of history, your student loans cover three of the five main factors that determine your score.
The good news is that student loans can drastically help your credit score and report, as long as you make on-time and full payments.
Dori Zinn contributed to this article.
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