Student loans, like most financial obligations, have the power to impact your credit score for the positive or the negative, depending on whether you pay on time, late, or have fallen into default. With most grads now leaving school with more than $30k in student loans (and some much more than that), it’s critical to know how student loans impact your credit score. If your credit score drops, you’ll pay more for auto insurance, your cell plan, utility deposits, and more. Here are other things to know about your student loans and your credit score.
Student Loans Are Installment Loans and Report Monthly
Experian, TransUnion, and Equifax report student loans as installment loans. By comparison, credit cards and store cards are revolving lines of credit. Having both installment and revolving lines of credit on your report can boost your score because it shows you can handle a mix of obligations. Student loans typically report to the credit bureaus on a monthly basis. If you pay your loan payments on time each month, that means you’ll have positive input that should boost your credit score.
What If You Miss a Student Loan Payment?
You might assume that if you miss just one student loan payment, or make one payment late, it’s no big deal. You might also assume that you have to fall significantly behind on your student loan obligation before your credit score takes a hit. Both assumptions are incorrect. The first time you pay late or miss a payment, your credit score should drop significantly. Although subsequent late or missed payments will continue to harm your score, it’s the first bad mark that makes for the biggest hit.
What Happens to Your Credit Score If You Default?
There are three statuses of student loans – in good standing, delinquent, and default. If you pay on time every month, you’re in good standing which means you’re meeting the obligations of the promissory note you signed when you took out the loan. If you miss a payment, or two or three, you are considered delinquent on your college debt. At 270 days past-due, you will be officially in default which can wreck your credit score and trigger other dire consequences.
How Can You Save Your Credit Score If You Can't Pay Your Student Loans?
Usually, it’s no surprise when you can’t make a student loan payment. You know that your finances are tight and you’ll have to skip a payment or pay it late. As soon as you know trouble is coming, the best thing to do is be proactive and contact your loan servicer. You can apply for deferment or forbearance to temporarily stop your student loans while you get your finances sorted or pursue other options. This can take a bit of time, so it’s best to request help before things get dire.
How Can You Lower Your Student Loan Payments?
There are several options to make student loan payments more affordable for those that are struggling with their finances. Pay as you earn allows you to lower your monthly federal student loan obligations to a reasonable percentage of your discretionary income. This is based on your adjusted gross income (AGI) for tax purposes compared to 150% of the poverty level. You can have your student loan payments dropped to a reasonable percentage (10-15%) of your discretionary income.
Which Options Protect Your Credit Score?
When you realize you cannot afford your student loan payments, you should contact your loan servicer immediately to see what options there are for you. Federal student loans have reasonable options such as those listed above. Your credit score will not drop if you are granted deferment or forbearance status. It will also not drop if you get on an income-based loan repayment program. However, missing payments, paying let, and paying less than the amount due will drop your score.
To find out more about improving your credit score after bankruptcy, contact Credit Score Keys for a free consultation. Call 919-495-2365 today.