While there’s not a lot of good news out there concerning student loans, having them can be really good for young consumers’ credit scores.
Credit scores are calculated based on certain aspects of a consumer’s credit report, including payment history, debt levels, age of credit and debt diversity. Having a well-managed student loan can actually have a positive impact on credit scores, if you handle them correctly.
Following the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, young consumers had to prove financial ability to repay debts in order to get a credit card. Having student loans establishes credit history, which is helpful for those who can’t access revolving credit, and for those with credit cards, a student loan improves the diversity of their credit profiles.
Like other forms of credit, applying for a new private student loan account (and some federal student loan programs) results in a hard inquiry on one’s credit report, which can shave a few points off credit scores. A new account appears separately from the inquiry on a credit report, also resulting in a slightly negative, short-term impact on credit scores.
The good news is that student loan inquiries, as with mortgages and auto loans, will be “deduplicated” on credit reports, allowing multiple inquiries within a small period of time, typically between 14 and 45 days. This allows consumers to shop for the best deal among private student lenders without unnecessarily hurting their credit scores. If you want to see how your student loans may be impacting your credit, you can get a free copy of your credit reports from each of the major credit bureaus annually. Also, you can look at your Free Credit Report Card, which will grade you on major credit scoring factors like payment history.
Borrowers can look at student loans as an opportunity to strengthen payment history. Late payments on any debt will hurt credit scores, but making on-time monthly payments during the student loan repayment process will be an outstanding asset on a credit report. That sterling payment history should be the goal, providing motivation to avoid making any late payments, or worse, defaulting on the loan.
The amount owed in student loans bears little impact on a borrower’s credit scores — it really comes down to the payment history, which is why it’s important to take on a manageable debt load and take advantage of loan repayment assistance when available.