It can be hard for students and young people to build a good credit score. You need good credit to get a loan, but you need to get a loan to build up good credit. There are a few ways to escape this paradox, such as acquiring a secured credit card or getting a loan from a credit union. However, utilizing student loans is perhaps the easiest way for young people to build and establish a solid credit history.
Student loans are considered a good type of credit, and having them on your report will help you quickly get a solid FICO score as long as you make the payments on time. Plus, deferral and forbearance options make it possible to postpone repaying your student loans without lowering your credit score. But student loans are difficult (if not impossible) to discharge through bankruptcy, so once you get them, you have them for life.
To understand how student loans follow you throughout your working life and influence your financial health, it’s important to consider what type of loan you are taking, what sort of repayment plan you will face, and what options you have regarding deferral, consolidation, and repayment.
Student loans, like other types of consumer debt, are reported to the three major credit bureaus. If you make your student loan payments before the due date, you will establish a good credit history, and that will improve your credit score.
Private and public loans both appear on your credit report. The payday loans Sparks open sundays three credit bureaus Experian, Equifax, and Transunion do not weigh public or private loans more heavily than the other, so late payments on either lower your credit score equally.
There is a distinction as to how private and public student loans can be paid off, and this is where the difference is most important from a credit history perspective.
Student Loan Deferral and Forbearance
Unlike private loans, federal loans allow the debtor to defer or forebear payments. This doesn’t affect your score, but it can influence a lender’s decision on whether to approve you for a loan.
What’s the difference? A loan deferral is a temporary period during which time you do not have to pay the principal balance of your loan. For example, if you have a $10,000 student loan in deferral, you do not have to pay any of that $10,000 back. You may, however, still have to pay interest that accrues on the loan. If the loan carries 5% interest, you may still have to pay for this interest in this case, about $ per month.
A loan forbearance is pretty much the same thing, but is for people who do not qualify for a loan deferral. Forbearances are granted on a case-by-case basis, and allow people to postpone repaying their student loans for a fixed period of time.
Both deferrals and forbearances have the same impact on your credit. Neither show up on your credit report; while the loan is in deferment or forbearance, it will appear as current on your credit report and impacts your credit score just as if you had been making payments on time.
However, lenders particularly mortgage lenders often investigate student loans that have not been repaid and have a higher balance than they should given the initial balance of the loan and the current amount owed. If they find that a loan is still in deferral or forbearance, they may deny a loan application, even if the applicant’s credit score is still good.