For those of us college students (as well as recent graduates), student loan payments are probably not something at the top of your to-do list. I mean, come on, this is money that is (or was) helping you get through college. There is a reason why you aren’t expected to repay this debt right away. What you may not know, however, is that there is a direct link between student loans and credit score — something that helps determine whether you have good credit or not. Based on this fact, these loans can make or break your financial future.
What’s a credit score?
You have probably heard this term quite often, but do you actually know how your credit score is calculated? Here is a quick breakdown, thanks to FinAid!:
- 35 percent is based on your payment history
- 30 percent is based on the amount of debt you have and how close you are to the limits on your accounts
- 15 percent is based on the length of your credit history
- 10 percent is based on new credit applications — meaning that if you apply for a number of different credit cards around the same time, your credit score could drop
- 10 percent is based on the type of credit you use (mortgages, car loans, major credit cards, store credit cards, student loans, etc.)
And boy is this number important because it will determine not only if you get a new cell phone or an apartment lease but it is also the main factor in determining how much interest you are going to pay on a future home or car loan. (Anyone remember the How I Met Your Mother episode when Marshall and Lily go to their mortgage broker?)
How can my student loans hurt my credit score?
Just having a student loan won’t cause your credit score to drop, per se, but there are factors that could negatively impact your rating, including:
- a missed payment — even one could cause a drop in your score
- a student loan lender who doesn’t report your payment history — something that you can request they do
- debt-to-income ratio, meaning that you owe too much in regard to your current income (don’t panic, this won’t become a factor until AFTER college)
According to an article on alltuition.com, “How Do Student Loans Affect My Credit Reports and Credit Scores?,” the worst-case scenario for your credit score would be defaulting on your student loan. The article stresses, “Do not, under any circumstances, default on your loans. Doing so will destroy your credit, and make it difficult, if not impossible, to rebuild your credit score. A student loan default will remain on your credit report for 7 years.”
How can my student loans help my credit score?
The good news is that if you make wise decisions, student loans can actually help improve your credit rating. You just need to follow a few simple guidelines:
- pay at least the minimum amount due
- make sure the payment is posted on or before the due date
- consolidate multiple student loans into one lump sum
- begin paying on your loans as soon as possible, even before you graduate — this can greatly reduce your debt-to-income ratio if you don’t end up making the big buck right out of college
- pay off the loan as soon as you can
What’s a good credit score?
Normally, credit scores fall somewhere between 300-850, with the higher scores being the best. However, different lenders use different criteria. An article on Moolanomy.com, “What is a Good Credit Score Rating?” by Pinyo on February 17, 2012, offers a look at how different institutions use credit rating scales.
The article explains, “According to Credit Sesame, a GOOD credit score rating ranges from 680-739 and an EXCELLENT credit score is anything above 740.” However, at “Credit Karma, a GOOD credit score is generally considered to be 720 or higher.” On average, any score over 740 will get you qualified for some of the top rates and terms.
Which begs the question: Do you know your credit score? You should be checking up on your credit yearly and making sure that everything is in order — be sure to report any incorrect information immediately! To get a copy of your free report, visit one of the following agencies:
Just like you put time and effort into studying for your exams, you also need to put some effort into securing your financial future. Although keeping student loans in check is only one way to do this, it is a big step. Take it! You’ll be glad you did!