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College debt keeps rising every year. Many are overwhelmed by the amount of their student loans and worry how they’ll pay them. But they don’t stop to consider what other aspects of their lives may be affected – including their credit score.
One starting point when it comes to credit knowledge is the type of debt student loans represent. Credit cards are revolving debt, which means they are a line of credit and your balance changes and the debt revolves and carries over month to month. Mortgage and auto loans are installment loans because they are a set amount of debt that you pay back over time in installments.
It’s easy to see by this definition that student loans fall under the classification of installment loans. They differ from mortgages and car loans in that they are unsecured debt, meaning they’re not tethered to an asset as are home and vehicle loans. Credit bureaus and credit score algorithms treat installment loans differently than revolving debt, but all affect your credit score.
How student loans affect your credit score
So long as you make your payments on time, whether you have private or federal student loans, it will benefit your credit score. Installment loans paid on time are always a plus for your credit. If you’re paying your debt properly, check your credit report and be sure that the track record of good payments is reflected there.
Student loans appear on your credit report from the moment you start taking them. Although they’ll display as “deferred” until you leave school and the six-month grace period expires, they are there. If you’re unsure how much you owe while in college and still incurring debt, your credit report may be a touchstone to assess your amassing debt.
After you graduate or leave school and enter the repayment period, the debt “turns on” and your payments will begin to affect your credit score. If you miss payments your score will drop, and when you make payments on time, the impact should be positive (unless you’re already delinquent). Every month, your student loans can be a force for good or bad on your FICO score.
Default vs delinquency
When you miss a student loan payment, you go delinquent. This is the status your loans will remain in for nine months, unless you cure it by catching up or making arrangements. After 270 days without a payment, your loans drop from delinquent to default. Going delinquent can drop your score 50-100 points, and it may drop further when you go into default.
Your payment history accounts for 35% of your credit score. In essence, leaving your loans in default or in collections as a result of consistent late payments will have grave repercussions on your credit score and your credit history. Neither situation is good for your credit score but default triggers unpleasant collection consequences.
What you can do about past-due student loans
If you can’t make your monthly student loan payments, you should immediately contact your lender for a forbearance or deferment. Either option temporarily stops your loan payments and can buy you time to refinance, consolidate, or get on a more affordable repayment plan and rehabilitate your student loans. Doing nothing lets your credit score suffer.
Once your payments are temporarily stopped, you can pursue an Income Drive Repayment (IDR) plan. Depending on your income, it can drop to as low as $0 a month no matter how much your loan balances. It’s solely based on disposable income, not your debt. After 20-25 years on an IDR, your loan balances can be discharged, although there are income tax consequences.
The bottom line is that student loans affect your credit score and leaving them to wallow in default is not good for your credit score. IDR may help, or you might be a candidate for bankruptcy relief of student loans. Once you get your student loans under control, it’s time to work on improving your credit score and re-establishing your credit. Check out Credit Score Keys for tips!