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Are Student Loans Impacting Your Credit Score? What You Need to Know

July 12, 2017

Even if you only have a basic knowledge of how credit scores are calculated, you may be aware of the fact that taking on debt and then paying it off in a timely and consistent manner is generally considered one of the best ways to build good credit, while late and missed payments can show up as black marks on your credit history.  What you might not know is that different types of debt can have different ramifications where your credit is concerned.

For example, the balances carried on credit cards are considered to be a form of revolving credit, according to Investopedia.  Lines of credit also fall into this category.  This type of debt includes a maximum limit and accounts are considered “open-ended”, which is to say, you still have access to agreed-upon funds even after you’ve borrowed and paid back up to the maximum.

Then there are installment credit accounts, including loans for houses, cars, and college tuition, just for example, which Investopedia characterizes as separate from revolving credit in that there are terms attached which specify the duration for payments, the number and amount of payments, and an end date for the loan.  Further, once payments are made, the money cannot be borrowed again.

These types of debt affect your credit score in different ways.  Revolving debt is potentially more damaging, as carrying high balances on credit cards could have an enormous impact on your credit score.  Revolving credit determines 30% of your score, according to MyFICO, although there are certainly other factors involved, including:

  • What is owed on all accounts
  • What is owed on different types of accounts
  • The number of accounts with balances
  • The percentage of revolving credit in use (credit utilization ratio)
  • The amount still owed on installment loans

Of course, if you find that revolving credit is severely impacting your credit score, Investopedia suggests that paying it down also has the potential to deliver significant improvements, and some people even utilize installment credit (personal loans) to pay off revolving credit as a means of lowering interest rates and shifting to a less impactful form of debt.

Although revolving credit accounts for a major portion of your credit score, installment loans can also have an impact in both positive and negative ways, according to an article from Student Loan Hero.  Here’s what you need to know about how student loans can impact your credit score.

How Can Student Loans Help Credit?

Because installment loans aren’t weighted as heavily as revolving credit when determining credit score, they may have less potential to damage your rating.  In fact, FICO statistics show that approximately 38% of consumers with student loan debt totaling over $50,000 fall enjoy a FICO score of over 700, which is considered the average score for American consumers, according to a recent article by Fox Business.  Those in the 740-799 range are considered to have very good credit, while a score of 800 or higher is considered exceptional.  By comparison, about 28% of consumers with student loan debt over $50,000 have scores under 599, which is considered a poor credit rating.

What does this mean?  It’s difficult to say, because credit ratings are based on so many different factors aside from student loan debt.  However, when managed appropriately, student loans, like any type of installment loans, could certainly improve a credit rating.

While revolving credit accounts for 30% of a credit rating, payment history is actually more important, delivering a whopping 35% of your credit score.  If you pay your monthly student loan bills on time and in full, you should be able to steadily build good credit over time, especially when you take the same care with all your other financial obligations.  Of course, this can be a double-edged sword, as well.

How Can Student Loans Hurt Credit?

While student loans don’t necessarily have the same major detractors as revolving credit, they still have the potential to harm your score if you don’t manage them appropriately, and even a single slip could cost you.

Even if you’re a responsible adult and you’re diligently paying down debt, it can be hard to juggle the many student loan payments associated with years of schooling (and taking out new federal student loans each year).  Something could slip through the cracks.  When this happens, it could have a negative impact on your credit score.

Even worse, the better your credit score, the more a late or missed payment could impact you, according to MyFICO.  This is because a higher score reflects less risk.  While a consumer with a lower FICO score is known to have some credit issues and is therefore somewhat less impacted by future problems like late or missed payments, someone with a stellar credit rating may fall further for similar infractions because the risk was not anticipated.  It doesn’t seem fair, but when paying down student loan debt, it’s important to understand the potential impact.

Why Does the Impact of Student Loans Matter?

Your credit score is used to determine whether you are approved for future loans and to calculate the interest rate and terms you are eligible for, according to Student Loan Hero.  While a single late or missed payment isn’t going to tank your score, and you can always speak with lenders about removing black marks on your credit report once you’ve rectified a mistake, you naturally want to maintain a high score if at all possible so as to improve your odds for loan approval and the best terms down the road.

How Can I Improve My Credit Score While Paying Off Student Loans?

Even if you’ve had smooth sailing so far, you may be interested in the benefits to be gained when you refinance student loans.  If you currently juggle several student loans and you’re worried about the possibility of missing a payment somewhere along the line, you could refinance and consolidate student loans into one convenient payment.

In some cases, you might even save money when you refinance student loans by lowering interest rates or transferring variable interest loans to fixed interest options.  It depends on your situation, but it’s something to consider when it comes to controlling how student loans impact your credit score.

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2019-02-22
Understanding Student Loan Payments

There are many options when it comes to paying student loans, and just as many questions! Questions like what these terms and situations can mean for a borrower. If you have questions about your student loans or want to learn more about how you can manage your repayment, check out these tips on understanding student loan payments.  

What is a student loan servicer?

  Your student loan servicer is the company collects your payments. According to Consumer Financial Protection Bureau, they typically handle most administrative task associated with your loan. Servicers do things like, answer customer service questions and enforce regulations provided by your lender related to your loan. You pay them for your loan and they give you options for repayment and deferment. It’s likely you’ll take out a student loan with one company and end up getting a different servicer. Your servicers can change too if your loan is transferred.  If you choose to consolidate or refinance with a company that gives you lower payments, better interest, or quicker payoff you’ll probably receive a different servicer.  

When should you start making payments?

  Start making loan payments whenever you can. Most student loans allow a period of non-payment while you are in school, known as a grace period.  On average most student loan lenders require payments to be made when the borrower is at less than half-time status for six months. You don’t have to wait until six months after graduating to make payments, though! If you can make payments while in school, you will save on interest and cut the time it takes you to pay off your student loans.  

What’s a student loan grace period?

  The grace period is typically a 6 month period that occurs after graduating, dropping below half-time enrollment status, or leaving school. During the grace period, you are not required to make payments on your student loans. Grace periods will vary based on the student loan lender that you have. Know what your grace period is so you aren’t caught off guard with late payments.  

Can I pay extra on my student loans?

  Yes! There are no prepayment penalties for federal or private student loans. Prepayment penalties are fees charged for reducing your loan balance or paying the entire loan off early. Many other types of debt like mortgages can have a prepayment penalty. Prepayment penalties were created to limit early payment of a debt, but no need to worry about that with your student loans. Instead, pay attention to how additional payments are applied to your loan.   If you make payments online some loan servicers allow you either pay extra on the principal or apply the additional toward interest on the next payment. Basically, if you choose to pay over the minimum depending on who your lender is, you may need to specify the amount that is a prepayment. Prepayments on your loans go towards the principal balance.  You should aim to make prepayments sometimes referred to as overpayments because it lowers the total amount of the loan. When the principal balance decreases it reduces the amount of interest you’ll pay in the long term. The next monthly payment will usually remain the same. Since you’re not applying additional money toward your next payment if you choose this option.  

Check Out This Prepayment Calculator

  Not all loan servicers will direct prepayments towards the principal of your loan unless specified by the borrower. Some lenders will count the prepayment as a payment towards your next monthly payment.  That can make it seem like your extra payments are hardly affecting your balances at all.   Instead, try to direct additional payments toward one loan’s principal. For example, if you have several loans through the same servicer, but one is $1,000, you can pay that off within a year. If you pay an extra $100 per month on that one $1,000 loan principal- it will be gone faster! If you’re not allocating prepayments strategically, you won’t see this same kind of progress.  

What if I can’t pay my student loans?

  There are limited options available when you can’t pay student loans. Weigh your options carefully. When making student loan decisions make sure you’re not adding stress to your future. First, contact your servicer immediately. You’ll have more flexibility if you stay on top of repayment before you start making late payments or missing payments. Avoid missing or late payments at all costs! Not only will late or missed payments damage your credit they put you at risk for extra fees. In addition to damaging your credit, risking additional fees, you could lose benefits available to only those who pay on time.   Repayment Options (Not a Long Term Solution) Look at repayment options. If you can’t pay with the plan you’re currently on there may be a better repayment option. If you are able to select another repayment option that lowers your payment you will want to consider doing so temporarily.  Doing this quickly will avoid you being late on future payments. It’s important to note that repayment plans are not a long-term solution to paying back student loan debt. We wouldn’t recommend for the long term because in more income contingent repayment plans the monthly payment isn’t covering the interest that is accruing during that period. Therefore, you can make a payment every month but the overall loan balance remains the same or could even increase!   Consolidating Student Loans If you’re in good standing on your loans, but want to reduce your payments student loan consolidation might be a good idea. Consolidation can make it easier for you to manage paying all of your loans, open you up to other repayment options, and reduce fees. It’s not a sure thing, but it doesn’t hurt to investigate this option and see if it is right for you.   Deferment or Forbearance: Use with caution! The last options to consider are deferment or forbearance. If you can avoid these options like changing repayment or consolidating, do it! Usually, borrowers have to be in financial hardship to qualify for deferment or forbearance. That doesn’t mean you’re off the hook because you’re in a tough financial spot. Depending on the loan you have, your interest might be added to the principal balance. This is really not ideal because it means your balances will grow. When you start paying again, your balances will be higher than where they are today. This is called capitalized interest—it equates to paying “interest on interest” and can get out of control fast if you use deferment or forbearance for longer-term hardship.   Most people don’t qualify for loan forgiveness because they are having a hard time paying their loans, but be aware that is possible. If you have developed a disability that precludes you from using your education or went to a school that has since shut down you might be eligible for forgiveness. Don’t count on this as an option, and don’t delay if you can’t pay your loans. Start investigating what’s available to you as soon as possible.  

What are income-based repayment options for student loans?

  Private loans may have options available that will lower your payments if you have a lower income, but the standard income-driven repayment plans apply to federal loans. Your monthly loan payment is calculated on your income. Your income is based on some stipulations and it may be taken into account things like your family size.   Income-Based Repayment The standard income-based repayment plan adjusts your payment if your loan payments are more than 10% of your discretionary income. Based on when you took out your loans, there may be other benefits or stipulations to meet in order to qualify. Regardless, you’ll have to calculate your loan payments based on your income and family size through your servicer.   Income-Contingent Repayment This type of repayment limits payments to 20% of discretionary income. The income will be based on income and family size. It is the only option available to Parent PLUS loan borrowers and requires PLUS borrowers to consolidate their loans to qualify.   Pay As You Earn and Revised Pay As You Earn There are limits on which form of this repayment plan you can qualify for. These qualifications are based on when you took out your loans. On the Pay, As You Earn plan you’ll have payments that correlate to 10% of discretionary income. The payment will be based on how much money you’re making and limiting the term of the loan to 20–25 years depending on whether you were a graduate or undergraduate borrower.  

Learn More About Parent Loan Refinancing

   

How does refinancing change my student loan payments and payback?

  Refinancing opens you up to lots of different options. Some qualifications to refinance include illustrating a responsible credit history. People often look into refinancing when interest rates are high, they have a steady income and good credit. Refinancing could help borrowers qualify for lower interest rates. Sometimes people refinance in order to get new loan terms and pay off their loans sooner. Shortening the loan terms on your loan can help you to pay less interest over the life of the loan. Borrowers will refinance to a longer term that allows them to continue the loan payments for a similar or longer period of time.  

9 Signs It’s Time to Refinance Student Loan Debt

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
Bride and Groom Figures Separating
2019-01-30
How Does Divorce Affect Student Loan Debt?

Lots of millennials are waiting longer to get married so that they’re more secure before tying the knot. The divorce rate dropped 18% in the last several years. Even so, divorce still happens. It doesn’t have to be the end of the world. Maybe your uncoupling is a fresh start, and separating your finances is the first step to setting up your new life.   As a millennial, many of us have student loan debt that is just part of our everyday reality. That’s true whether we’re married, single, or divorced. This is why so many people often will end up seeking out help and advice about student loans during the divorce process. Answers aren’t always clear, but we can help. There are a few things you should know to prevent any financial surprises.  

Can’t Divorce a Servicer

Student loan responsibilities after a divorce—particularly for Federal Loans—will be dependent on whose name is on the loan. If you and your ex-spouse agree on a payment arrangement that requires one of you to help pay, if it’s not in your name on the loan, that may not be enforced by the servicer. If your name is on the loan, you’re the one they’re going to pursue for payment.  That doesn’t mean you shouldn’t try to come to an agreement that works for both of you but stay on top of which of your loans are being paid. Make sure you never miss a payment even if your ex is supposed to be paying it.  

Repayment Amounts and Plans

With divorce, your family size changes, as does your household income. Changes to income and family size can mean changes to your monthly payment. Now it’s likely these changes will only happen if you are on an income-based repayment plan. It doesn’t mean that your monthly payment will go down, but your loan payment could go up or down. The payment amount will depend on what your spouse’s income was when compared to yours, so everyone’s situation is unique. Make sure to update the paperwork and stay current on your loans as you transition to paying your debts on your own.   If you’re having trouble making payments, look at different repayment options like an IBR plan so that you stay current on your loan payments and don’t fall behind. If at all possible, avoid deferment. Deferring your loans ensures that you don’t fall behind on payments, but the interest continues to accrue while you are not paying. This could extend the life of the loan and increase the amount that you owe, so it really should be a last resort.  

Credit Score

Some people think just filing for divorce will negatively affect credit, but that isn’t necessarily true. What can affect your credit is the process of changing your bills around. For example, putting things in solely your name that weren’t previously could affect your credit score. Making big financial changes like selling a house, refinancing, or restructuring debt can also have effects on your credit score. Some of those things could be good and some could lower your score, so it just depends on your situation. For example, adding on more debt without increasing your income could have a negative effect on your credit score.   If you are in the process of reassessing your financial situation on your own, you’ll want to review paperwork. Gather vital documents like your credit report and score. If you haven’t checked your credit report in a while, now is a great time too. Make sure there are no errors on your credit report and ensure that you know what your score is. You may be looking to make some changes that will certainly need a credit review. Changes could include looking for housing on your own, your own mortgage, changing the car you drive, or something else that will require a credit check. Don’t be caught off guard by not knowing what’s on your report right now.  

State Laws

The laws will either determine the debt as separate property or marital property. Now, separate property generally includes things like assists obtained before marriage like that of inheritance. Generally paraphrasing anything obtained by an individual before marriage is considered separate property. Anything that remains outside of separate property typically is marital property. Marital property is where the state laws really play a role.   Your remaining marital property will be divided based on if you are located in “community property” state or an “equitable distribution” state. During a divorce in a “community property” state, any marital property is split down the center at fifty-fifty. Most states tend to fall into the “equitable distribution” state law. The “equitable distribution” law says that each party has a legal claim to the asset or debt. The portion of value that is then divided to each party is determined by a number of different factors according to The Court.    

Cosigners and Private Loans

Private loans can be more complex. For instance, if your ex-spouse is a cosigner, then you are both responsible to pay the debt. If he or she was not your cosigner, the debt is the responsibility or you and your cosigner, if any.  

It might be a good time to refinance loans.

Whether you are just entering the divorce process or have already completed, see if now is the time to refinance. Get in touch to have one of our friendly advisors walk you through the process and give you information on how we can help.   Divorce can be one of the most stressful events a person will face, but empowering yourself with information will make it easier to navigate. Be sure to consult with a lawyer before you start divorce proceedings so that you can prepare. Do your best to work together to come to an agreement that helps you both afford to live on your own so everyone can move forward.  

Click for Requirements to Refinance Student Loans

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
Students On College Campus
2019-01-25
Don’t Wait for Graduation to Pay Down Student Loan Debt

What does a currently enrolled graduate student, a recent graduate, or a Doctorate student all have in common? The answer is simple, student loans. Sounds like a bad joke, but student debt in the United States is no joking matter. The current student loan debt total has hit $1.5 trillion as of 2018 according to Federal Reserve data. If you find yourself a borrower of student loan debt, know that debt doesn’t just start after graduation. The moment your loan is approved you become a borrower and therefore take on the responsibility to pay down that debt. As a borrower, here are some ways to be financially responsible and pay down debt quickly ensuring yourself a brighter financial future.  

Don’t Go Overboard

  According to CollegeBoard the average full-time bachelor degree seeking student, who attends a four year school will pay somewhere in the range of $21,370 to $48,510 per year in 2018 - 2019.  Now the average Master’s seeking student will pay about $19,080. These estimates do include the cost of room and board and will differ depending on if the student is attending an out of state school or an in-state school.   When the time comes to apply for your loans, be sure you have a budget! We cannot stress this point enough you need a financial plan before you make the decision to apply for student loans. Know what you’ll need to borrow money for. Think about tuition costs, housing, meals, book costs, personal costs, and transportation costs. Only borrow what you absolutely need for school.  

The Countdown

  Don’t be the student who has the countdown until graduation. You know, the one using the grace period to look for their future career and move back in with their parents. Now there’s nothing wrong with moving back in with the parents to save a few bucks, in fact, we would encourage it. What we mean is instead of waiting until the clock starts at the end of your grace period start paying down debt on day one! The sooner you can start throwing money at your student loans, the better off your future self will be.   Now it doesn’t have to be an astronomical amount of money. Even the smallest contribution towards your debt will help you in the long run. Let’s say that instead of going out to brunch with your friends on the weekend you decide to make it. Let’s say you usually buy an egg and cheese, on a bagel with a coffee for about $10 for simplicity. That $10 a week can turn up to $40 a month.   Say you took out $30,000 in student loan debt. If you completed a $40 payment every month while you’re in school, you would save $2,515 from the total of your loan. Yes, you can drop almost $3,000 off your loan by simply making a $40 a month payment. Small sacrifices make all the difference in paying down your student loans before graduation.  

It’s No Vacation

College in the past was seen as an experience but it is not any longer. Don’t treat your education like a vacation with a limitless budget. According to the Bureau of Labor Statistics, the annual American household cost for eating out is $3,000. Even if it’s only one person, that would count as a household. Broken down that would be $250 a month the average household spends eating out! Before you start spending money on food remember that’s money that could go towards your student loan debt. We all have to eat to live, but is eating out necessary? Try using that meal plan or doing weekly grocery shopping and meal prep.  

Stay in Budget

Someone once said “Just because you can, doesn’t mean you should” that could not be truer here. Though you may have money for streaming services like a Spotify Premium® membership or Netflix® – doesn’t mean you should have it. In addition to cutting down on eating out, you could lose that Netflix® account. About nine out of ten college students use Netflix® according to Daily to Reader. If you’re living on campus you’re provided with free cable. Yes, the keyword being “FREE” - drop the subscription services and put them towards student loan debt. No, you won’t be able to watch the latest series of Stranger Things on your own, but I’m sure your friend or their friend has Netflix®. The Basic plan on Netflix® as of 10/2018 is $7.99 a month. Let’s take your savings from cutting back on eating out including our previous example- $100 and savings from losing that Netflix® subscription $7.99 that equates to 107.99 a month towards student loan debt. When you pay $107.99 every month towards your loan it is a savings of $7,083.71 from the total loan amount.  

They’re Called Doctors

  If you’ve ever seen the movie Tommy Boy you’ll get the reference. If not, you can watch the clip online. Going to school for seven years is for doctors, not the average student seeking a bachelor degree. All jokes aside, you need to do your best to graduate on time. Staying in school longer means more debt and that means more money you’ll need to pay off in the long run.   In recent years there has been a trend of typical 4-year degrees taking 6 years to achieve. Students who take longer to graduate are spending 50% more than participated for their degrees according to Student Debt Relief. One major tip (no pun intended) know what you want to major in before starting. It’s okay to change your major but work closely with counselors take summer classes. Do your best to stay on track for your estimated graduation date.  

Evaluate Loans

Yes, you finally graduated! Don’t be fooled the work doesn’t stop. To continue being a financially responsible borrower you’ll need to evaluate the types of loans that you have. Do you have federal or private loans? The type of loans that you have will have major implications on the options that you available to you moving forward.  Pay attention to your interest rates and knowledgeable regarding repayment types.   Be wise; if you are within that 6 month grace period, continue to make those payments because we know that they will pay for themselves and then some. Create a long-term plan to pay down your debt. Use your income to create the long-term plan and stick with your budget. There are so many resources available at your fingertips to research things like loan consolidation, student loan refinancing, student loan forgiveness, and deferment and forbearance.   Your responsibility for staying a responsible borrower is to continue those healthy spending habits that you created for yourself in college. In addition you should look to further your education. Do you want to get a Master’s Degree? Use reliable sources and stick to a budget and long-term plan. Education is so no joke. Whether you’re the currently enrolled graduate student, a recent graduate or a Doctorate student debt doesn’t have to weight you down forever.  

Learn More About Grace Periods

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.