How Do Student Loans Affect My Credit Score?
The common mantra, “You get what you pay for” has lead many college students down the road to high levels of debt from student loans that will hopefully provide a brighter financial future for them. However, upon graduation, these students often find that they have such a high level of debt and an entry-level job that does not provide for paying the loans off anytime in the near future. The worry for many of these new graduates now focuses on their credit. After all, a high level of debt has never been great for one’s credit score.
One of the most difficult parts about the road ahead might be your ability to obtain credit. There are many creditors out there who could be hesitant to loan you money or give you a credit card based on your high level of debt and your low initial salary. And, depending on what your past credit rating is already it could be all the more difficult.
Because you are a recent college graduate, you student loan debt is probably the largest debt that you have ever had, and this is one of the reasons it is going to effect your credit. Usually, we think of our credit rating in terms of our ability to pay back our liabilities, however, our credit rating also takes into consideration our level of debt. This is why your credit is going to be affected when you graduate and your student loans are high.
If you do intend to take out student loans or you already have them, you should consider determining a plan for paying them off now. A successful payment plan will be instrumental in helping your credit score, especially since your credit score involves the level of debt and your payment history. When you establish a payment plan, you will help yourself financially by promoting healthy financial habits that will only further help your credit score and your financial life in the future.
Also, for those who have student loans and have not yet graduated, one of the best tips for helping your credit and the payment process is to start paying on the interest now. The government usually allows you to wait until after graduation to begin making payments, however it can be surprising how much the loans add up to over time. If you can pay some while in school, do so; and, you will be avoiding costly interest and a larger sum to be paid back upon graduation.
When you do graduate, most student loans allow for a grace period – time to find a job before you need to begin paying of your loans. Usually the grace period is somewhere between 6 and 12 months, however there is a good chance that you may find employment before then. Therefore, use that time to set aside money that you can use towards your first payment to the student loan. This way, your first payment is a decent amount, and it will start you out on the right foot financially.
After your grace period, you typically have a 10-year period to pay off your student loan. The amount you owe each month will be determined by this timeline; however, you can always and should if possible pay more than the minimum amount due. When you pay more than the minimum amount due, you will obviously pay the balance off faster and you will also pay less interest.
Just like any financial liability, it is definitely not wise to skip payments for your student loan, because it will affect your credit. Instead, a good idea is to contact your lender and try to negotiate a payment plan that works better for you. Most lenders are surprisingly nice to work with; and, if you contact them, they will most likely be willing to help you find a solution to your troubles rather then letting your skip payments. Talk with them if you find yourself overwhelmed, and demonstrate your willingness to act in good faith.
Most importantly, do not default on your student loans, because your credit will be in serious jeopardy if you do so. Chances are it will remain on your record for 7 years. Also, if you default on your loans, you could find yourself in legal trouble and your wages could be garnished. Instead, avoid the trouble and pay your loans off.
While student loans are necessary for many, when it comes to your credit, they can be risky. Be careful and responsible when it comes to paying them back. You will be glad you did.