When you’re first in college, this may be one of the few times in your life that lenders throw money at you. You can easily access tens of thousands, even hundreds of thousands of dollars in student loans. Your campus mailbox will be stuffed with credit card offers and if you’re not careful, you can graduate with much more debt than your starting salary can cover. And if you can’t make your loan payments, it can put you in a money crunch. But what’s worse is what can happen to your credit score and the avalanche of problems that can follow!
#1 Good News: Student Loans are Treated as Installment Loans
Installment loans are loans with a balance that you pay down in installments over time. These include car loanss and mortgages. So why is it good that student loans are recorded as installment loans? Because they don’t carry as much weight on your credit report. By comparison, credit cards and equity lines are revolving lines of credit which carry much more weight in calculating your credit score. So if you do have a late payment here and there, it won’t hit as hard as late payments on a credit card (but should still be avoided).
#2 Bad News: Paying Off Student Loans Early Can Lower Your Credit Score
This one makes no sense, right? Here’s what happens. Diversity in the types of credit you have – credit cards, car loans, mortgages and student loans all blend and the mix can result in a higher score. Paying off your installment balance can lower your score a bit. But here’s the thing – with money freed up from your paid off student loans, you may be able to afford a mortgage or car loan (which many with student loans are postponing because of their educational debt). The savings on interest and feeling of accomplishment from paying off a loan more than make up for the small ding.
#3 Good News: You Can Be Late on a Payment and Not Suffer Terribly
If you’ve got a ton of student debt, you may be living paycheck to paycheck and if you have a hiccup like a car repair or other unexpected expense it may run you late on your bills including your student loan payment. The good news is that running a few days late (or even a couple of weeks) may not generate a negative item on your credit report. Sallie Mae doesn’t report a late payment until you are 45 days past due. Other lenders may report once you hit the 15-30 day mark while others may wait until you hit 90 days. If you’ve suffered a financial setback, contact your lender to ask when they report to the agency so you can decide what bills you need to prioritize to protect your FICO score.
#4 Bad News: Lower Credit Score Costs You Money Everywhere
You may not realize how important your FICO score is to many aspects of your life. Many corporations run credit checks before establishing a relationship with you and a poor score can cost you a job, apartment or access to cell coverage. When you sign up for gas and electric service, they run a credit check. A lower score will trigger a deposit (which can be hundreds of dollars) and higher rates for your utilities. The lower your credit score, the more you will pay for auto insurance and the higher your interest rates will be on auto loans, mortgages and credit cards!
#5 Good News: Deferment or Forbearance Won’t Ding Your Credit
If you are truly struggling with your student loan payments, you should look into Income Based Repayment (IBR) and Pay As You Earn (PAYE) to lower your payments to affordable. If you are unemployed so no payment is affordable, the great news is that neither deferment or forbearance will negatively impact your FICO score. There will be a notation on your report, but your score won’t drop! So rather than let your loans go delinquent or into default which will definitely cause your credit rating to take a nosedive, look into deferment or forbearance as a last ditch credit salvaging option.
One of the best ways to protect your credit report from damage due to student loans is to get informed and stay informed. Even if you’re making your payments as required, reporting errors can happen. By signing up for our totally free student loan management tool, you’ll know if an on-time payment was mis-recorded as late right away. The tool also helps you to manage and optimize your debt. And if you’re having difficulty making payments or looking for ways to fast-track your loans for a quicker payoff, look through our blog for tips and strategies and our new student loan help center for How To guides on dealing with debt.