Many students worry about the impact of student loans on their credit. Fortunately, the impact of student loans on your FICO score and the perception of your credit worthiness is generally positive. Here’s what you need to know.
Having student loans creates a history of credit on which you can build your financial house. When vetting your creditworthiness, many lenders see student loans positively if the loans are paid as agreed and not in default. Also, young borrowers with student loans have an advantage over others their age who don’t have student loans because their credit history is started in their late teens instead of their mid-twenties. Remember, the older your credit history, the better.
If your student loan is in deferment, this will not negatively impact your credit score. A matter of fact, some lenders will see the ability to place student loans in deferment as a positive. Remember, deferring payment on your student loans gives you flexibility when facing a financial crisis.
Early Payment Harmful
Paying off your student loans early may actually hurt your credit score because a huge part of your score is determined by the age of your accounts. Unless you have other installment loans that are as old as your student loans, be prepared for a drop in your FICO score once you pay off your loans.
In some cases, student loan lenders will backdate a deferment. This means that if you became delinquent on your student loans at a time when you were eligible for a deferment, once your deferment is approved it will be backdated to the first date you became delinquent.
Many student loan lenders do not report delinquencies to the credit bureaus until you are 60 days past due. This means that even if you fall behind on your payments, you’ll have time to make corrections before your credit score is impacted.
While federally backed student loans provide many protections and benefits, private loans are different. Many private loans do not offer the type of deferments and delayed reporting on delinquencies offered by their federally backed counterparts.