Friday, October 23, 2009

Your Student Loans Will Affect Your Credit Score

How Student Loans Affect Credit

As you can see, any type of loan, including a student loan, will influence all the above factors in some way. However, a student loan can be a good thing or a bad thing, sometimes both, when it comes to your credit.

Positive Influence Student Loans Have on Credit

Making your student loan payments in full and on time each month is the best thing you can do for your credit score. Doing so will give it a big boost. Additionally, a loan will help to establish a credit history if you didn't have one previously and aid in varying the types of credit you possess.

Negative Influence Student Loans Have on Credit

On the other hand, missing payments can hit your credit hard. If you borrow more than you can afford, your credit score will likely reflect that fact when you fail to pay back your debt on time. Additionally, the loan will significantly increase your outstanding debt (the amount you owe) until it's paid off. Finally, if you continue to obtain new loans over time, it could hurt your "new credit" percentage.

Of course, if your parents are the ones acquiring loans to help pay your tuition, it is their credit score that will be affected, not yours. Your credit will only come into play if these loans are in your name. Instead, consider opening the loan in your name and have their contributions regularly go toward paying the loan off.

Even if your parents have already saved money for your education, a student loan in your name will also help to build your credit. Many student loans defer interest until after you're out of school, so you can accumulate 4 years of regular payments on your credit file without paying more than the actual cost. However, make sure Mom and Dad are reliable and have a steady source of income, or you'll be stuck with the bill and possible damage to your credit.

Overall, if you can get a student loan on your own, the long-term effect will be positive as long as you pay it back on time. You may see a dip in your score at first, but in the long run, a student loan can actually do great things to establish and build solid credit.

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