How Can You Build Your Credit History with an Education Loan?
Last Updated : June 4, 2020, 1:05 p.m.
Monthly installments of your education loan affect your credit profile and score, but how they affect depends on your payment pattern. The thing which matters is that you’re responsible for ensuring timely EMI payments happen. So, do education loans help build a credit history? Yes, they do! Read this post and know.
Make All Your Payments on Time
Using your education loans to build credit history isn’t easy; you need to complete every payment in full, on or before the due date. Lenders will look at your payment history to determine the creditworthiness. If you’ve missed or made late payments with penalty interest, your credit score can suffer. Paying your education loans on time is the primary factor in building your credit history. But you must know your capacity, both financially and personally, to make timely payments.
If you miss payments then it can hit your credit report hard. Late payments will stay on your credit report. And the more payments you miss, the more delinquency marks you’ll get on your report. To help keep your payments on track, you can use ECS, NACH or Standing Instruction services.
Make Your Payments Affordable or Get Help
If your EMI payments are high and you are struggling to pay them each month, so what should you do? You can talk to your loan provider and see what options are available for your situation. You might get an income-driven repayment plan or deferment until you get regular income. You might be eligible for a deferment or forbearance, where you can temporarily pause your payments without hurting your credit score.
Look for the Balance Transfer Option
If your education loan interest rates are high and making it difficult to pay them, you should look for a lender that might give you a better offer. This helps you transfer your existing education loan at a new rate of interest. The balance amount remains the same just the EMI and payable interest may differ. See the example to know how it is done.
For example, if you have an education loan of INR 8,00,000 for 10 years at an interest rate of 14.00% per annum. And it costs you INR 12,421 EMI payment every month and total interest of INR 6,90,558. When you choose to do a balance transfer to get a 9.60% interest rate for the balance amount after 5 years, how much will you save? Check out the table below to know the same.
| Particulars | Details |
|---|---|
| Original Loan | INR 8,00,000 |
| EMI Payable at 14% | INR 12,421 |
| Paid Interest till 5 years @ 14.00% | INR 4,79,109 |
| Interest Outgo @14% for 10 Years | INR 6,90,558 |
| Balance Amount | INR 5,33,831 |
| EMI @ 9.60% for 5 Years | INR 11,238 |
| Payable Interest After Transfer | INR 1,40,422 |
| Paid Interest till 5 years @ 14.00% + Payable Interest After Transfer | INR 6,19,531 |
| EMI Saved | INR 1,183 (12,421-11,238) |
| Total Interest Savings | INR 71,027 (6,90,558 - 6,19,531) |
Your Credit Impacts Your Financial Goals
Your credit score represents your creditworthiness to the lender and helps you borrow loans. The better the history, the higher the score, which is calculated using your credit history and credit utilization. The utilization means how much credit you’re using versus how much you have available. It also includes how long you’ve had credit and the variety of accounts you hold, and that will include your education loans. So, if you look for a home loan or a car loan in the future, your credit report will be checked.