Since the 90’s, student loans have become an increasingly popular method of paying for higher education. As far as credit goes, a student loan is labeled as an installment loan on your credit report. It is in the same category as an auto loan or mortgage so, as long as you pay the installments as agreed, it can actually help your credit. Installment loans require you to pay a finite amount of money over a specified time period. Paying a student loan can therefore help you establish a clean track record with the credit bureaus.
However, if you are late in paying installments, it can hurt your credit. Student loans differ from other types of loans in that lenders often provide additional time to pay before they report you as late. But payment history makes up 35% of your FICO score and has more impact than any other factor.
What If I’m Late or Miss a Payment on My Student Loans?
Everyone is prone to being forgetful. But don’t panic if you realize you didn’t pay on the due date. It will only affect your credit score if the lender reports the late payment to one or all three credit bureaus; when a late payment is reported depends on the type of loan.
Private student loan service providers can report a missed payment after 30 days, but federal student loan servicers must wait at least 90 days. That gives you time to realize your mistake and make up your missed payment. Nonetheless, the lender can still charge a late fee. But if the late payment is reported, it can have an even more damaging, and lasting effect, because a delinquency stays on your credit report for seven years.
Not every overdue payment has the same impact. Generally, the more overdue you are, the more damage to your credit you can do. For example, being 30 or 90 days late in paying is not as bad as not paying for 270 days or more, at which point a federal student loan will go into default.
Does Applying for a Student Loan Affect My Credit?
The application process often includes a credit check; meaning the lender will do a hard inquiry, which shows up on your credit report for two years. Whether you’re approved or denied for new credit, it can drop your credit score by a few points. Adding installment credit to your credit report improves your credit mix, which accounts for 10% of your score. Having different loan products shows you can manage your credit from different sources, and being on time helps improve your payment history.
On the downside, large amounts of debt, which include student loans, make it harder to save and increase your debt-to-income ratio. A high ratio can affect your eligibility for a mortgage or other loan. Taking out a loan you can’t afford to pay won’t benefit your credit, despite having a mix of credit types. But since student loans often have long repayment terms, they can help extend the length of your credit history (that’s 15% of your credit score).
Should I Refinance My Student Loans?
Refinancing can trigger a hard inquiry, but shopping around can avoid an impact on your credit. Shop around for the lowest rates by getting rate estimates through lenders’ pre-qualification processes. And apply for multiple loan options in a short period. FICO counts multiple hard inquiries that are within 14 days of one another as one, so remember to submit your applications within that time frame.
Address Any Credit Issues Before Applying for a Student Loan
If you have a low credit score and/or there’s negative information on your report, you might not get approved for a loan. But addressing past delinquencies, missed payments, and even bankruptcies and charge-offs can improve your credit. An error can appear on your credit report as well. These issues can be fixed, but many credit repair companies use unethical, and sometimes illegal, practices. At American Credit, we are familiar with the dispute letter process and employ a pre-litigation process to get lenders, creditors, and credit bureaus to take action.
To learn more or receive a free credit consultation, call us at 855-274-1732 today.