Experian explains ways student loan debt can impact a credit profile and other ways to build credit as a college student.
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Student loans can help build your credit if you manage them responsibly, but they can also damage your credit if you're not careful. Experian explains some ways student loan debt can impact your credit profile and other ways you can build credit as a college student.
Student loans are a type of installment loan with regular monthly payments over a set repayment term. When you accept a federal student loan or get approved for a private student loan, the loan servicer or lender will report the new account to the credit bureaus.
If you've never dealt with credit before, student loans can help you establish a credit history for the first time. According to FICO, it takes at least six months after opening your first credit account to obtain a FICO Score.
Even if you already have a student credit card or you're an authorized user on a parent's card, adding an installment loan to your credit file can diversify your credit mix, which also helps your credit.
Payment history is the most influential factor in your FICO Score, which means that making on-time student loan payments can help you establish a positive payment history over time.
Keep in mind, though, that college students typically don't need to start making federal student loan payments until after they graduate, leave school or fall below half-time enrollment. As a result, student loans may not have a huge impact on your credit score while you're in school—though you can make small payments during that deferment period to be more effective.
When you pay off a student loan, your score might drop slightly, particularly if your student loan was your only installment account or if your remaining installment accounts have high balances relative to their original loan amounts. That said, this dip is usually temporary. The positive payment history on the account will remain on your credit reports for 10 years after payoff.
According to Experian data, student loan borrowers have an average balance of $38,787. That can be a significant financial burden, and if you don't manage your student debt responsibly, it could potentially hurt your credit. Here's how.
Delinquency
If you have federal student loans, your loan servicer will typically report missed payments after 90 days—the timeframe is just 30 days for private student loans. Just a single missed payment can damage your credit score significantly. The longer you leave your loans unpaid, the more damage your missed payments will do.
Default
Defaulting on federal student loans means that you've failed to make a payment for nine months—private lenders may start the process sooner. At this point, your student loan servicer or lender will send the debt to a collection agency, which can result in a collection account on your credit reports.
The collection account, combined with your missed payments, can wreak lasting havoc on your credit score.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI)—the portion of your gross monthly income that goes toward debt payments—isn't part of your credit score. However, it is an important factor lenders consider when you apply for credit.
The average student loan payment is $203, according to Experian data. But if yours is significantly higher or your income is relatively low, a high DTI could make it difficult for you to qualify for affordable financing on purchases such as a new car or a house.
Many factors play a role in determining your credit scores, and student loans can affect these in different ways. The primary credit score factors are often grouped into five categories:
As you work to establish your credit history, here's how you can use your student loan debt to your advantage:
Whether or not you're using student loans to help pay for school, there are several ways you can build credit from scratch. Here are just a few popular options to consider:
While you may not yet have all the responsibilities and stressors of adulthood, your college years are an excellent time to develop good financial habits that can make it easier to establish a solid financial foundation for the future. In addition to creating a budget, building your credit history is crucial to helping you hit the ground running after you graduate and begin your career.
This story was produced by Experian and reviewed and distributed by Stacker Media.