How Student Loans Can Help Your Credit Score – CreditSimple
Most news stories about student loans focus on the negative aspects of student lending, including the monthly payments and expensive interest charges over time, but there is one big benefit of student loans young professionals should celebrate: an opportunity to help your credit score.
If you make consistent, on-time payments on your student loans, over time you should see your credit score rise. Let’s take a look at how your student loans help your credit, what you need to do for the best benefit, and what to avoid that could send your credit score to the gutter.
Build your on-time payment history
The first part of using your student loans to build credit is paying on-time. In fact, your on-time payment history is the number one factor in your credit score above everything else.
Turning on automatic payments for your student loans ensures you never miss a payment due date. As an added bonus, most student loan providers offer a small interest rate deduction with auto pay. That is a win-win!
It only takes a few late or missed payments to seriously harm your credit, but it takes years of on-time payments to join the 800+ credit score club. Don’t lose track of your payments to make sure they have the best positive impact on your credit.
If you do miss a payment or pay late, that payment will harm your credit score for seven years. To keep negative information off of your credit report, do everything you need to ensure you pay by the due date.
Also keep in mind that other credit accounts matter just as much as your student loans. Credit cards, auto loans, personal loans, and lines of credit all show up on your credit report just like a student loan.
Show you are responsible with credit over time
Another important factor in your credit score is your account mix and account balances. A student loan is a form of installment loan, which means you make the same payment each month for a period of time until the balance is paid off. As you make payments and lower the outstanding balance, your credit score should go up.
Installment loans can also be good for your credit in general. Many people start their credit experiences with credit cards, which is just fine. But if you only have credit cards and carry a high balance, you are sure to see your credit score stay down in the trenches.
Adding an installment loan to the mix adds to your credit mix and should offer a mild benefit to your credit score. A mortgage is the most helpful installment loan for your credit, but student loans can put you on the right track.
Avoid late payments and missing the minimum due
As we briefly discussed above, missed and late payments show up on your credit report for seven years. If you pay on-time but less than the minimum payment, that’s another big mistake that will crater your credit score for years to come.
Just as student loans can help your credit report and credit score, student loans can cause serious damage to your credit. The key is how well you keep up with your payments.
If you pay less than the minimum or pay late, student loans will make your credit score go down. If you pay at least the minimum and on-time every month, your credit score should go up. That’s really all there is to it!
Of course, paying your student loan bills may be easier said than done. If you owe hundreds of dollars per month, covering housing, food, and other bills could really squeeze your budget. While it is ideal to make extra payments to pay off your student loans early, at the very least you should always make the minimum payment.
How your student loans can ultimately save you money
In an ideal situation, you’ll be able to make big extra payments each month and pay off your student loans well ahead of schedule. I worked hard and paid off my $40,000 student loans two years after graduation.
Over the years, I tracked my credit score from around 720 when I started my MBA program to well over 800 today. This steady credit score improvement saves my family hundreds of dollars every month and tens of thousands of dollars over the years on my mortgage.
The difference in a poor credit score and a good credit score might be the difference between getting approved for a new mortgage loan and getting turned down, stuck as a renter.
If you are approved for a mortgage, your credit score has a huge influence on interest rates. On a $200,000 mortgage, a 0.25% difference in interest rate is worth $X for the monthly payment and $X over the term of a 30-year loan.
When you get ready to buy a home, or a new car, or anything else that relies on your credit, you will be thankful you made steady on-time payments for your student loans.
Use your student loans for good
Student loans are a type of “good debt,” or debt that can give you something in return. Just like a mortgage gives you a place to live, student loans help you get the best possible education. Once you take on that debt, it is your responsibility to make regular payments or your credit will suffer.
But if you handle things responsibly, like any other credit account, your student loans can help you build and improve your credit. While student loan interest may be a big expense while still paying off your loans, in the long run the boost to your credit score and mortgage savings may make up for that interest expense and more!
Your student loans already got you an education, if they can help you build credit too, you found the student loan sweet spot. High five!
How many points do you lose if you make a payoff agreement vs. paying off the whole balance due on collection accounts?