The Impact of Student Loans on Credit

Student Loans on Credit

Getting an education in the United States is expensive. The average cost for just one year of college is $25,000 for a public school and over $50,000 for a private school. In most cases, neither students nor their families have this much sitting aside to cover one year of schooling, let alone the typical four or more. And for this reason, most college students end up taking student loans at some point during their college career.

Assuming a student attends a four-year public university, and four years costs just over $100,000, then why does the media refer to often to the typical college debt being well over that? The answer to that is simple—while college loans are a necessary evil, in almost all cases, you will end up paying back over twice the value of the loan. Why? It’s all because of the interest that accrues during schooling.

Why get a student loan?

At this point in time and based on the current costs for a college education, it’s pretty much impossible to consider attending college without taking on a student loan. The general concept of a student loan does make sense if you can’t go to college without financial support. Your loans can cover your tuition, room, and board, as well as books and fees, and as we said before, most families find it challenging if not impossible to save for college while covering the rest of their living and daily expenses. As a result, an estimated seven out of ten college students take student loans and graduate with at least some financial burden.

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According to the Bureau of Labor Statistics (BLS), the average four-year college graduate will earn twice the monthly salary of someone who did not go to college. Even when considered against students who went to college but didn’t earn a degree, those who graduated from a four-year college will likely take twice as much in salary and will experience more promising rates of employment.

Student loans can give your credit score a boost If you are on the fence about getting a student loan, consider that the mere act of getting a loan and paying it back on time can have a positive result on your credit score. Of course, student loans can have a detrimental impact, too. Student loans come with extended repayment periods, and as a result, your credit score will experience a boost from having a long credit history. As long as you make your payments on time every month, you are bound to experience a benefit to your credit score. However, if you default on your loan or make late payments, you could damage your score. And getting into a bad credit situation at such a young age is not a place you want to be. Your student loans will have an influential impact on how creditworthy you will appear to lenders. Therefore, you should make sure you understand how a student loan will impact your credit score.

What affects your credit score

Before we begin, it is vital that you understand what your credit score is and how it is affected. In simple terms, your credit score is a three-digit numerical expression based on an analysis of your credit files. This score is then used to depict your creditworthiness, which is your ability to take on credit and pay it back on time. Your credit score is primarily based on a credit report that comes from FICO (Fair Isaac Corporation) and typically provides information sourced from the three main credit bureaus (Equifax, Experian, and TransUnion).

The primary factors that comprise your credit score include:

  • Your payment history
  • The amount of debt you have (also referred to as credit utilization)
  • The age of your credit accounts
  • The number of credit accounts you have in your name
  • The number of new credit inquiries (which is an indication that you are seeking additional credit)

Three ways your student loans could impact your credit score

Assuming you abide by the repayment terms of your loan, your credit score will receive a positive benefit.

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  1. Paying on time

This represents a significant part of your credit score—about 35%. Creditors (those who issue a credit to you) report your payment activity to the major credit bureaus every 30 days. While one late payment might not hurt your score (creditors understand that accidents happen and that we all forget things once in a while), but multiple late payments will have a negative impact. Missing a payment on your credit card bills, student loans, mortgages, or car loans will all affect your score, so, it is imperative that you pay your student loan on time. And if you do, it will help start building that positive credit history.

2. The act

of getting cash guaranteed approval 5000 helps you to build a credit history—Just having a student loan can be useful for your credit score. You need to have credit in order to get a credit score, and the length of time that you leverage credit can be good for you. So if you have never taken out a loan and you are in a position to ensure you can repay it, this is a good way for you to start establishing that credit history.

3. Avoid too many credit inquiries

Once you are granted credit the first time, it can get a little bit addicting. All too often, students get approved for their loan and decide that since they got approved, they should apply for other credit options. too. This might mean a car to drive around on the weekends, a department store credit card for shopping, or something else. Every time you apply for credit, it is a hard hit to your credit score. This is the same as a credit inquiry, as mentioned above. While this isn’t always a bad thing, too many hard hits to your credit can worry creditors and make them less likely to lend to you.

Student loans can help you succeed

College can be a fun and very exciting time, but it can be stressful, too. Though student loans are not free and eventually need to be paid back, they do serve a vital purpose, which is to help you get your education completed without scraping funds up every month to pay the bills. Because most student loans don’t require repayment until a few months after you graduate, it means you can focus on your studies during the school year. Then, when you graduate and get stable employment, you can start paying off what you borrowed.

By the time you graduate and begin making payments once your repayment period has begun, you will be setting yourself up for future financial success, just through your student loan. Your credit score will play a vital role for you in the future, so take time now to grow a healthy credit history.

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