A student loan is the first step many of us take towards building credit. It’s the first loan many of us get, and it might be the first time our payments get reported to credit bureaus. It’s important to understand the terms of your student loan and adhere to the repayment schedule.
How do student loans impact credit scores?
Student loans affect your credit score. They’re a form of credit, like a personal or home loan or a line of credit, and like every other kind of credit, they require responsible use. If you pay late or skip a loan payment, it will negatively impact your credit score.
But the opposite is also true. By making regular, on-time payments and managing your student loan responsibly, you’ll build a positive payment history that can help maintain a healthy credit score. Keeping a student loan in good standing can be a smart way to build good credit, making you more eligible for other types of loans and credit.
Student loans from private lenders have a bigger impact than loans from government-funded programs. If you have a private loan, be extra diligent about your repayments.
Student loans are unsecured installment debt
Student loans are a form of unsecured installment debt. Unsecured debt is debt that does not require collateral - unlike mortgages and other secured loans, which do require collateral.
As installment debt, student loans are paid off in regular, scheduled payments, usually at a predictable fixed amount.
Will my credit score drop when I take out a student loan?
Your credit score will likely drop when you take out a student loan, because it represents a new credit risk before your on-time payments are recorded. But with responsible behavior, your credit score will bounce back.
However, if you’re taking a deferred status, stalling payments for a period, your credit score may not be impacted. Your loan balance is still outstanding debt, so some lenders may take that into consideration when approving you for a new loan or line of credit. But many credit agencies exclude deferred student loans from their calculations.
How can I tell if my student loans are impacting my credit score?
The U.S. government will report late payments on federal student loans to credit bureaus after 90 days. However, private student loan lenders can report late payments after only 30 days.
Late payments affect your credit score. Check out your credit score report through your tax agency or online on a free website.
What if I can’t repay my student loan?
If you can’t make your scheduled payment, ask for help. Talk to your lender about lowering or pausing your monthly payments.
If you have a federal loan, sign up for an income-driven repayment plan. If you have a private loan, look into a modified payment plan. Not all lenders offer them, but it’s worth exploring.
Changing the terms of your loan or adding a new program won’t hurt your credit – as long as you make your scheduled payments.
