How Student Loans Affect Your Credit Report

With the average student loan amount at the end of 2013, being $29,400, many college graduates are now wondering how their loans will affect their credit report. While the high costs of education may have forced them to take a student loan, many college students ignore their loans until the first payment is due. Unfortunately, by that time, many of them find themselves in in a bad situation, especially with the rise of post-graduation unemployment.

The best time to consider how your student loan will affect your credit is before you even apply for one. Knowing how your loan will affect you could have a large impact on how much you choose to borrow and, in turn, on how much you will have to repay. Consider that the average fixed interest rate for a Stafford loan right now is 6.21 percent, and private loan rates are even higher. Private loans’ rates are based on your credit score, and they tend to be variable rates, which means that the rates can fluctuate throughout the life of the loan.

Speaking of the life of the loan, the standard length of a student loan is 10 years. There are other repayment options, one of which, the extended repayment option, will allow you to lengthen your term by up to an additional 15 years. Extend with extreme caution, though; lengthening your loan term also greatly increases the amount of interest you will pay over the life of the loan. If you are financially able, it is best to pay your loan off sooner rather than later.

There are consequences to mismanaging your student loan repayments. If you are in danger of being late, it’s better to contact your loan provider and ask to defer your payments. A deferred payment does not affect your FICO score, unlike a late payment, which will incur a late fee and create affect your credit report after a certain time period. Also, deferring payments on certain loans stops the accrual of interest until the deferment period is over, while making late payments allows interest to accrue on top of the unpaid interest and the principal! Even worse, if your payment is more than a few months late, your loan will go into default status. A defaulted loan severely damages your credit and dramatically decreases your FICO score, making it difficult to qualify for other types of credit, including renting a home or apartment.

There is a silver lining, though. A well-managed student loan can help a new graduate establish a great credit history. Since your FICO score is based on different factors, including payment history, length of credit history, and debt to credit ratio, paying your loan responsibly over the length of the loan will increase your FICO score a little more each year. If you choose to take a student loan, take no more than you need, and pay on time every single month. You will be doing yourself a huge favor.

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