Student loan debt can definitely impact your financial profile, credit history, and credit score – either in a detrimental way or by improving your financial status and ability to save money. It all depends upon how you manage that student loan debt, and whether you are able to make your payments on time to fulfill your obligations as a responsible borrower.
What makes up my credit score?
Lenders and other creditors depend on credit reporting agencies to keep tabs on your credit history, so that when you apply for a loan they can see your track record for repayment. Banks and lenders also use your credit score – which is numerical ranking of your credit worthiness – as a quick snapshot that they use to evaluate how risky it may be to make a loan to you.
The lower your score, the higher the risk may be that you will fail to make your payments on time. A high score, on the other hand, usually indicates that you are a reliable and responsible borrower. If you do not yet have much history as a borrower, a student loan gives you a great opportunity to begin building good credit. But if you already have established credit you can leverage repayment of your student loan debt to raise your financial profile even higher.
Who tracks my student loan payment history?
There are three major credit reporting companies or credit bureaus – Equifax, Experian, and TransUnion. They receive updates from creditors including student loan lenders and relevant information goes into your credit file where it can be viewed by authorized parties such as mortgage companies, credit card issuers, and lenders who handle auto and consumer loans.
In some cases employers or potential employers may also ask for your permission to access your credit history. Nearly half of all employers rely on credit checks to help them make hiring decisions, in fact, according to a 2012 survey conducted by the Society for Human Resource Management. That is another incentive to proactively manage your student loans, since they may influence your career opportunities.
What are the risks of student loan payment default?
If you make a late payment, miss a payment, or default on a student loan it can undermine your score and create potentially serious financial problems. A student loan default will likely remain in your credit report for seven years and if your financial profile is weak you may have to pay more to borrow or you could have your loan and credit card applications rejected.
Defaulting on a student loan can trigger other consequences like having the debt turned over to a collection agency or even having your wages garnished to repay the obligation. You may also incur legal fees and court costs. If the situation is bad enough your tax refunds could be taken along with any professional licenses that you hold. If you are a doctor, lawyer, or teacher, for example, defaulting on a student loan could jeopardize your ability to maintain the license required for you to work.
What can I do to strengthen my credit score?
But with a strong profile you can borrow more easily, at lower and more attractive interest rates and preferential terms. Payment history comprises about 35% of your total score, so having a record of consistent, timely student loan payments enhance your score and financial profile. So if you are having trouble making timely payments, you may want to consider doing a student loan refinance or consolidating all of your student loan debts. Those strategies may enable you to switch to a student loan with a significantly lower monthly payment.
Even if you are making your payments on time without difficulty, refinancing or consolidating your student loans could potentially save you thousands of dollars over time by lowering the amount of interest you have to pay. As a result your financial health will improve and you may be able to accumulate more wealth by accelerating your savings. Incidentally, the impact on your financial history and credit score is the same whether it is a government loan or one from a private lender like a community bank or credit union.