If you are recent graduate or are soon to be, then you know that student loans can feel like an impossible burden that will hang over you for some time. First of all, you should remember that most students are in this boat, and therefore the loans are designed to be affordable when paying them back.
But since you have been loaned such a large amount, you might also be wondering what kind of impact this will have on your credit score. This is a great question, and if you are not thinking about it yet, then now is the time to begin. The answer is: student loans certainly play a role in setting your credit score, but they have less of an impact than you probably think.
Managing debt is good for your credit
Having this much debt is not a bad thing. In fact, if you maintain your schedule and make your payments on time every month, it will go a long way in building good credit. When thinking of how something will impact your credit score, always tell yourself that if you just tackle the debt as intended, then your credit score will improve.
"Paying your student loan debt on time will go a long way in building healthy credit."
Don't pay it off too quickly
But paying your debt back within the intended period of time means just that – sticking to the schedule. If you pay off your loans too quickly, this can actually hurt your credit score. Many people do not know this and just assume the sooner the better when it comes to eliminating debt. You need to be aware, as noted by All Tuition, that lenders earn capital on the interest from your debts, and therefore paying it back too quickly means you might not be worth another lender's time.
Stick to your monthly payments, as this will not only keep lenders happy and help your credit score, but will also help you maintain a balanced budget from month to month. That being said, there are certainly factors that come in to play that set you back financially. It is likely that this will never be the case. But that doesn't mean you can't prepare and keep yourself on track.
Not as bad as you think
When you find yourself unable to make payments, you might be surprised to learn that student loan debt doesn't bring your score down too much. However, if you know you are going to hit a point where you can't make payments, it is better to call your lender and ask for a deferment instead of just missing payments.
According to U.S. News & World Report, a deferment is common when it comes to student loans, and will not affect your credit score. Additionally, student loans are most often treated as installment loans, which are designed to be paid back over a long period of time. Due to the nature of these loans, they are less impactful to your credit report than revolving credit, which are smaller, and more frequent debt balances such as credit card purchases, according to the Deseret News.
Revolving debt is more spontaneous and easier to get carried away with, which means lenders consider it more important to your financial behavior, and in turn, your credit score. Again, making timely payments on an installment is still what you want to be doing, but don't think you are never going to be able to purchase a home in the future if you have a rough month or two.
The bottom line
Having debt is a responsibility, but it is also a privilege. When you pay your debt back on time it demonstrates to lenders that you are disciplined and worth lending money to. Your credit score is something you will always be carrying around with you, much like debt. Keeping the two at a healthy level is what it is all about.
If you have debt from student loans, make sure you have a plan in place to pay them back.