Credit score

Do Student Loans Affect Your Credit Score?

Student loans can have both a positive and negative impact on your credit score. For one thing, paying off loans over a long period of time is a great way to build credit, but your credit score will also drop quickly if you miss payments. The good news is that when you understand how student loans affect your credit score, you can take steps to avoid potential negative impacts.

How do student loans affect your credit rating?

There are several ways a student loan can impact your credit. Here are some of the most common.

Positive impacts

Although many students take out student loans before they have an established credit history, student loans can help improve their credit score over time. Some of the benefits include:

  • Positive payment history: As with any other type of credit, if you make your monthly payments on time and in full, they will help you establish and maintain good credit. In fact, your payment history makes up 35% of your FICO score, so it’s crucial that you stay on track.
  • Good credit mix: Lenders like to see that you can handle different types of credit. In other words, having a student loan and a credit card is generally better than having two credit cards. Your credit combination represents 10% of your FICO score.
  • Long credit history: Many recent graduates may not have had a chance to establish their credit history yet, and having student loans helps with that. And because student loans typically have repayment plans that can last 10 to 30 years, they can help lengthen your credit history, a factor that accounts for 15% of your FICO score.

Negative impacts

Like other types of debt, student loans have the potential to lower your credit score both temporarily and over the long term. Some of the disadvantages to consider are:

  • Credit application : Most federal borrowers do not undergo a credit check when applying for a loan, but if you are applying for a private student loan or student loan refinance, the lender will usually thoroughly investigate one or more of your credit reports. This will temporarily affect your credit score, although FICO says each additional in-depth investigation reduces your credit score by less than five points.
  • Negative payment history: If you miss a debt payment by 30 days or more, the lender will usually report it to the national credit bureaus. Since your payment history is the most influential factor in your FICO score, missing even one payment can be devastating to your credit score. Plus, it will stay on your credit reports for seven years.
  • Deferred benefits: It may surprise some students that student loans won’t have a huge impact on your credit history until you start making payments after graduation. Although student loans show up on your credit report soon after you receive the loan funds, the greatest benefits come from timely payments, which many students don’t start making until six to nine months after obtaining the loan. of their degree.

How do student loans affect a co-signer’s credit score?

If you are applying for a private student loan or student loan refinance, your credit may not yet be in good enough condition to be approved on your own. In this case, you can ask a family member to act as a co-signer on your loan application.

In general, student loans impact a co-signer’s credit rating in exactly the same way as the primary borrower. In effect, as a co-signer, you guarantee that you will make payments on the debt if the primary borrower does not.

When you submit the application, the lender will thoroughly investigate the credit reports of both applicants. And while on-time payments will help boost the co-signer’s credit score, failure to do so could significantly damage their score. This outcome can be especially frustrating for a co-signer who was simply helping the primary borrower get approved.

Beyond the credit score, it’s also important to note that student loan debt will show up on the cosigner’s credit reports as if it were their own. This means that when they apply for credit, especially a mortgage, their debt ratio will include that payment, even if they don’t.

As such, it is crucial that any co-signer considers the pros and cons before agreeing to help.

Do you need good credit to refinance student loans?

You can usually get approved for refinancing a student loan with a credit score in the mid-600s. But refinancing usually only makes sense if you can get better terms on your new loan. So while you may meet the basic eligibility criteria, you may need a much higher credit score to qualify for favorable enough terms to make the process worthwhile.

To give you an idea of ​​what to expect, Purifyan online platform that helps student borrowers connect with refinance lenders, found that the average FICO credit score for people who refinance their student loans is 774. Additionally, the average annual income is $98,156.

Of course, that doesn’t mean you have to have a credit score and income at those levels to get what you need. But the better your credit and income situation, the higher your chances of refinancing at a low rate.

And remember, if your credit score isn’t quite ready for student loan refinancing, you can ask a loved one to co-sign your application. Just make sure you both understand the potential pitfalls that can arise with this arrangement.

The bottom line

Student loans can have a positive or negative impact on your credit score, but the good news is that you can avoid the biggest negative effects simply by paying your bill on time each month. As you take the time to build your credit, you may also be able to benefit from a lower interest rate by refinancing your student loan.

Before you apply, however, consider prequalifying to get an idea of ​​what you might qualify for if you submit a full application.

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