Student loans can improve or mar your credit score. Your student loan payment history is part of your credit report and is used to calculate your credit score. Do student loans affect credit scores? Yes, your student loan may hurt or impact your credit score positively.
Credit Scores
Your credit scores determine whether subsequent lenders will borrow your money or not. A good credit score boosts your chances of getting loans from private or public organisations. This is because your credit scores show how reliable you are in paying back your loan.
Positive Impact Of Student Loans on Your Credit Scores
Your student loan can impact your credit scores positively, provided that you pay your loan as when due. When you do not miss any of your loan payments. Your loan payment history is one of the criteria for calculating your credit score.
A positive payment history from your student loan will boost your overall credit scores. According to FICO Score, your loan payment history makes up 35% of your credit score.
Federal student loans under the IDR plan spread the payment of your loan for up to 25 years. A long credit history can positively impact your credit score. According to the FICO Score, long credit history makes up to 15% of your credit score.
Credit mix is another criterion used for calculating your credit score. Having a good payment history on your student loan plus a credit card will give you a good credit score. Managing two types of credit impacts your Credit Score more than managing two of the same kinds of credit.
Negative Impact Of Student Loan On your Credit Scores
While a good student loan payment history can boost your credit score, poor performance can also harm it. Having your missed payment reported to the National Credit Bureau can leave a dent in your credit reports for seven years.
A poor credit score prevents you from getting a loan from private loan companies. A private loan company will dig deep into your credit history before approving your loan application. Each credit inquiry reduces your credit score.
When you apply for a loan from a private organisation, they make inquiries about your credit history. Each deep inquiry about your credit history may lower your credit score by 5%. This may even make it more challenging to get your loan approved.
How is Credit Scores Calculated?
Your credit score is calculated by assigning a certain percentage to five major criteria, which include;
- Payment history
- Credit mix
- Amount owed
- New credit
- Length of credit history.
According to FICO Scores, 35% is attributed to your payment history, 30% to the amount you owe, and 10% to your credit mix. Another 10% is attributed to your new credit and 15% to your length of credit history.