Going to college is a huge decision not only in the course of life, learning and career, but also financially.
It shouldn't come as a surprise, given how expensive college has become in the U.S, that about 65% of college grads in the U.S finish with some sort of student debt. As more people become educated about their finances, in today's world it's important to know what effect student loans may have on your credit score.
In this blog we'll go over what kind of financial vehicle student loans are, how they'll appear on your credit reports, along with advice and tips about how to use student loans to better your credit and help you get a start on having good credit history.
What are student loans?
Student loans are like any other typical installment loan, they have a set amount of payments spanning a set time period and in this case are used to finance the costs of attending a university. Depending on the loan, payments may start immediately, or after the student has graduated.
As you can imagine, not all student loans have the same terms. The biggest distinction typically comes from whether a loan is Federal or private, and even so loans may still differ on things such as the interest rate, payment structure and more.
What kind of loan is a student loan?
Like we said earlier, all student loans are installment loans, regardless of the type or who you get it from. This means that they start with an initial balance, and have a set time period and predetermined amount of fixed monthly payments to be paid off. It's the same kind of loan as you would see for a mortgage or auto loan.
The main difference between student loans and revolving credit, like a credit card, is that revolving credit accounts can change over time, they report a utilization ratio and can become more important as they age, the payments on those accounts can vary as well as the balance carried. Installment loans have the same payment every month and the loan's effect on your credit is best when it is paid off.
Student loans can be a great opportunity to build credit history for a better future, but they can also be a heavy debt burden. Learn how student loans can be best utilized for your financial benefit.
How fast do student loans appear on my credit report?
When a student loan is approved by the lender, the account will be created between you, your lender, and your parents if the loan includes them. The loan will begin appearing on your credit report almost immediately. Repayment of the loan typically can start immediately, or there may be a grace period that can push the repayment even up until months after graduation.
As far as how the loan is reported, student loans will appear as 'deferred' until you begin your repayment. This is more typical of federal loans, of which there is more opportunity to have deferred payments until after graduation. For this reason you should read through and compare the details of your various loan options to see what will offer you the most favorable terms.
How can student loans negatively impact my credit?
Even though student loans are a debt that serves as an investment for higher future earnings they must still be approached with caution. Like any other good debt, you must consider the affordability of the debt and the worthwhileness of the investment.
If you find yourself unable to keep up with your payments the consequences are typically harsh. If your loans enter delinquency and default you risk a significant drop in your credit score, the loan being sent to collections and having a collection on your report, as well as the loan being garnished from your wages.
Do student loans help to build my credit?
Student loans can have a different effect depending on how you handle them. By taking out a responsible amount of debt and making sure you are able to keep up with payments, student loans can be your first foray into credit-building, and can end up being quite helpful.
As always, student loans will increase your debt burden, and may impact your ability to qualify for credit that takes into account your debt to income ratio, such as mortgages. Given this it is extremely important to think ahead and plan out how much student loans would be a sustainable and responsible amount for you.
How can people with student loan debt build credit faster?
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