Student loans may have a key impact on your credit score, positively as well as negatively, based on how you manage them.
Making on-time payments and managing your student loan debt responsibly can help you build and maintain a good credit score, while missed payments or high levels of debt can lower your score and make it harder to qualify for credit in the future.
It influences your credit score in the following ways:
Establishing credit history: Student loans can help you establish a credit history if they’re your first credit accounts. Your payment history, including student loan payments, is one of the most critical factors in determining your credit score.
Making on-time payments can help you build a positive credit history, which is essential for your credit score.
Credit mix: Student loans add diversity to your credit mix, especially if they’re your only instalment loans. Having a mix of different types of credit, such as instalment loans (like student loans) and revolving credit (like credit cards), can positively impact your credit score, as it demonstrates your ability to manage various types of credit responsibly.
Impact on credit utilisation: Unlike credit cards, where your credit utilisation ratio is calculated based on your credit card balances relative to your credit limits, student loans don’t directly affect your credit utilisation ratio.
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However, if you have other debts, such as credit card balances, student loan payments could affect your overall debt-to-income ratio, which lenders consider when assessing your creditworthiness.
Loan amount and debt level: The amount of student loan debt you have relative to your income and other debts can impact your credit score indirectly. High levels of student loan debt could affect your ability to qualify for other types of credit, such as mortgages or auto loans, which may impact your credit score over time.
Missed payments: On the flip side, missed or late payments on student loans can have a significant negative impact on your credit score. Payment history is the most influential factor in credit scoring models, so consistently missing payments can lower your score and make it harder to qualify for credit in the future.
Frequently Asked Questions:
How do student loans help establish credit history?
Student loans can help you establish a credit history if they are your first credit accounts. Your payment history, including student loan payments, is one of the most critical factors in determining your credit score.
Do student loans add to the credit mix as well?
Yes, they certainly do. They add diversity to your credit mix especially if they are your only instalment loans.
Do student loans affect your creditworthiness?
If you have other debts such as credit card balances, student loan payments could affect overall debt-to-income ratio, which lenders consider when assessing your creditworthiness.
Does the amount of student loan debt affect credit score indirectly?
High levels of student loan debt could affect your ability to qualify for other types of credit, such as mortgages or auto loans, which may impact your credit score over time.
How do missed payments towards student loan affect credit score?
Since payment history is the most influential factor in credit scoring models, missed or late payments on student loans can have a significant negative impact on your credit score.
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Published: 13 Mar 2024, 05:58 PM IST