How Do Student Loans Impact Credit Score?
Last Updated : July 22, 2020, 2:07 p.m.
Education loans are provided to students to help them pursue their higher studies in India or abroad. And if you have taken a student loan, you should know that it can impact your credit score. It can affect your credit score either positively or negatively, depending on how you pay the EMI. Student loans come with a longer repayment tenure, and your credit score can get a boost with this long credit history. As your payment history is a vital part of your credit score, so making your loan payments on time every month is necessary to build a healthy credit score . But if you default on your payments, your credit score will fall rapidly. Because your loan payments have a big impact on your credit profile and show your creditworthiness. It’s important to understand how student loans could impact your credit score. Read this post for the same.
Pay on the Due Date
Your payment history can build up 35% of your credit score . However, try not to miss any EMI payment to build a healthy credit history. When the repayment starts, you should look for the ways to save money to use it later to pay the student loans. And it will reflect on your credit score positively.
Type of Loan
The type of credit used also impacts your credit score. It contributes to 10% of your score. So, borrow carefully when you apply for a student loan. Because if you borrow more it will be difficult for you to pay that on time. And if there is a need for a high loan amount for admission in college then you can pledge collateral against the loan amount. A secured loan makes you creditworthy and you can get that loan at an attractive rate of interest.
Repayment Period
The length of your credit history can also influence your credit score. Student loans often come with a repayment period of 10 years or more, which may help you build the credit history for a long time. You can pay it quickly if you want by doing a prepayment. But is it worth it? No, you shouldn’t do it early if you want to build a good credit history for long. Because if you pay it early then there will be no records of a long repayment history on your credit report. You should pay off early when you feel the crisis lurking around in your profession.
What Could be Negative Effects of Student Loans?
If you don’t manage student loan payments well, both your credit score and credit history will be in bad shape. Below are the things you should avoid when servicing a student loan.
Late Payment
While paying on time will be a huge help on your credit score, paying it late will have the most negative impact. That’s why it shows up in both as an advantage or disadvantage. Paying your student loans late can reduce your credit score.Try to refinance your student loan in favorable terms if the current EMI doesn’t help you manage the payment properly.
Affects Your Debt to Income Ratio
Your student loans can affect your debt to income ratio which determines how much of your income is taken up for the debt payment. Lenders will look at this to determine whether you qualify for a loan or not. Financial advisors suggest the debt to income ratio should be 36% or less. If your ratio is high you may not qualify for a loan anymore. You may qualify for a loan but at a higher interest rate. Paying a higher interest rate can impact your finances negatively in the long run.