Today, guest blogger Nichole Coyle, CERTIFIED FINANCIAL PLANNER™, discusses different student loan options and how they can affect your credit score.
If you plan on going to college, make sure to research the type of student loans that are available, which might work best for you, and how they affect your credit score. The three most common types of student loans are federal, parent plus and private.
Federal student loans are offered through the US Department of Education and typically have the most flexible repayment options. These loans are taken out in your (the student’s) name and help you start to establish credit. There are no hard inquiries on your credit with these types of loans, so you do not have to have an established credit history to get one.
Parent Plus Loans
Typically offered through federal programs, though some private loan servicers provide them as well. Parents take out these types of student loans, and a hard inquiry is made on their credit to determine eligibility. Regardless of who will be making the payments, these loans will affect your parent’s credit score, not yours.
This student loan may be hard to get if you don’t already have established credit and a good credit score (the potential servicer will run your credit to see if you qualify). You do have the option to add a cosigner on these loans.
Whoever agrees to co-sign must have an established, good credit score—the better the credit score, the lower the interest rate. If you need a cosigner, they will be on the hook for any missed payments, and their credit score will be affected just like yours, for better or worse.
How Student Loans Affect Your Credit Score
Typically you are not expected to start making payments on student loans until six months after you separate (leave school and do not graduate) or graduate from school, though some private student loans require the start of your repayment right away.
There are three main credit bureaus: Experian, Equifax, and TransUnion. These credit bureaus use certain factors to calculate your credit score and make up your credit report, including the age of credit, credit mix, credit utilization, new credit, and payment history.
Overall, student loans will mainly affect your credit mix, age of credit, and payment history. Those three things make up 60% of your total score, so you want to be mindful when you are deciding how much student loan debt to take on. You want to be able to manage your payments once you finish school.
Age of Credit
The longer you hold credit, the more it positively contributes to your score. An average is calculated using all of your accounts, so if most of your debt is older and you take on a new student loan, it won’t affect your score much. If you only have one or a few mature debts and take a handful of new student loans out, it could shorten your average credit age and could reduce your score. The age of credit contributes to 15% of your total score.
All of the different types of credit accounts you have like a mortgage, loans and other credit cards factor into your credit mix. A healthy credit mix includes a nice blend of revolving credit and installment loans. Your credit mix only contributes to 10% of your total score.
Making at least the minimum monthly payment on time each month positively impacts your credit score. Late or missed payments will hurt, so make sure to submit your payments on time. Payment history is an essential aspect of your credit score, as it makes up 35% of your total score.
How do I avoid hurting my credit score?
Make your payments on time! If you miss a payment or make your payments late, it can drastically affect your score. One missed payment can cause a mark on your report and a decrease in your score that can stay on your report for up to seven years.
There are programs in place that can help you find a payment plan that works for your current financial situation, or defer payments altogether, until you’re in a better position financially. If you’re struggling to make your student loan payments, call your servicer to determine what options are available to you.
As always, if you have any questions and would like to discuss this topic or any other financial topic, please don’t hesitate to contact me! If you don’t want to miss a blog post from me, sign up here for a monthly reminder and link to my blog post.
Nichole M. Coyle
CERTIFIED FINANCIAL PLANNER™
20333 Emerald Pkwy
Cleveland, OH 44135
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