Student loan debt is ubiquitous. According to an Experian report, just over 14% of consumers held student loans in 2019, with an average amount of over $35,000. While some Americans in their 60s and 70s still hold student loan debt, you’re more likely to have a load when you leave college, when you may also be attempting to establish credit for the first time.
To maximize your existing credit, you must grasp the relationship between your student loans and credit score. If you play your cards well, student loan debt can be a source of advancement. However, if you mishandle your hand, it could hurt you. Knowing the connection between your credit score and student loan might help you make the most of a difficult situation.
For a federal student loan, what is the minimum credit score required?
Federal student loans have numerous significant benefits over other borrowing options, including the ability to develop credit. Unlike any other type of loan for international students, federal loans do not require a credit history. This is a substantial positive compared to alternative loan options, which sometimes necessitate a cosigner for borrowers with poor or nonexistent credit. Federal student loans help to establish a positive credit history independently.
Only very rarely, such as when applying for a Graduate PLUS loan or a Parent PLUS loan, is a person’s credit history considered. Lacking a good credit history, you may need a cosigner (also known as an endorser), or you can try appealing the decision.
Federal student loans’ interest rates are also cheaper than those on many other methods of creating credit, such as credit cards and private loans. They provide additional safeguards if you run into payment difficulties and, in some situations, may even be written off entirely. Because of these advantages, student loans are an excellent option for dependable borrowers looking to establish or improve their credit histories.
The minimum credit score for a private education loan
There is less regulation in the private student loan market than in the federal student loan market, where your lender will be the Department of Education. The “private student loan” industry is unregulated, meaning anyone can claim to be your lender.
The minimum credit score expected by individual private lenders varies widely. On the other hand, good credit improves your odds of acquiring a loan and a reasonable interest rate, as is the case with any loan (670 or above, according to FICO). Private student loans often require a cosigner to help borrowers qualify because most students do not yet have established credit histories. Those borrowers with established credit histories who return to school as adults are the main exception to this rule.
One study conducted between 2017 and 2018 by the Iowa Office of the Attorney General found that almost all applicants were approved for private student loans, except those with the lowest credit (549 or lower). The interest rates on loans range from 3% to 12.875%, with even borrowers with excellent credit being subject to this range.
This is why it is in your best interest to compare prices. A borrower’s credit score takes a short-term hit whenever a lender looks into their financial history. However, you can reduce the damage to your credit score by doing all your rate shopping within a 30-day period, which will be seen as a single credit pull.
What Is the Minimum Credit Score Necessary to Refinance a Student Loan?
Simply put, a student loan refinance is switching out their existing loan for a new one, usually a private loan, rather than adding to their current debt. This is since consolidating multiple federal student loans into one loan is the sole option for borrowers.
Getting a new private student loan through refinancing is treated like any other unique personal student loan application. Your chances of getting a good interest rate increase as your credit score rises. There is no universally required credit score when applying for loan refinancing because every lender has its own requirements. However, a cosigner may be required to assist you in getting approved if your credit isn’t stellar.
The Impact of Student Loans on Credit Rating
Once you have student debts, they might affect your finances. This article will discuss the most frequent ways in which student loans might lower your credit rating.
Transactional Record
Your ability to make payments on time is the most crucial aspect of your credit score. About 35% of credit score is based on this one aspect.
Your credit score will be affected after you begin making payments on your student loans because each payment (or lack thereof) will be noted. Over time, your credit score could improve if you maintain a history of prompt payments (pro tip: set up automatic payments).
However, your credit score will hit you if you are late with payments or default. The late fee may not affect your credit score, but it will likely result in a cost. After 30 days and every month until paid, most lenders will record a late payment to the credit bureau. Your credit score will decrease further, and negative information regarding late payments will remain on your credit report for seven years before being deleted.
Due Amount
About 30% of your credit score is based on the total amount of all your open debts. Your credit usage ratio is primarily affected by your revolving debt from things like credit cards because FICO’s algorithm typically gives this form of debt a higher weight.
Depending on your payment history and current balances, it’s possible that having the same amount of debt on a credit card would have a more significant negative impact on your credit score than having the same amount of debt in student loans. If you owe $35,000 in student loans, for instance, it probably won’t have as much of an impact as if you owed the same amount in credit card debt.
The proportion of your monthly expenses to your income is one factor that can affect your student loan balance. Although this has little bearing on your FICO score, it can affect your ability to get loans like credit cards and mortgages in the future. It may be more challenging to qualify for other types of loans in the future if your student loan payments consume a sizable portion of your income.
Credit History Length
Lenders prefer long-term repayment plans to short-term IOUs because the former shows more excellent financial stability. As a result, the length of your credit history accounts for around 15% of your credit score.
If you merely pay the minimum on your student loans, it will take you at least ten years to get rid of them. Although no one ever plans on being in debt for that long, it can be used to establish a solid credit record.
Balance of Credit
Lenders value evidence that you can handle a variety of debt, so they want to see that you can take installment loans and revolving credit well. Roughly 10% of your credit score is based on the types of credit you use.
Proof of your ability to handle and repay an installment loan is strengthened by possessing college loans. Just like demonstrating your ability to manage revolving credit by applying for and paying off a credit card can boost your score, so can using a credit card responsibly.
The Negative Effects of Student Loans on Credit
With student loans in hand, it’s essential to keep an eye out for the following:
Subsequently, overdue payments. The two ways that student loans can hurt your credit are by making late payments or by defaulting entirely.
Putting in for a private loan to help with school. When you apply for a loan, the lender will run a hard inquiry on your credit, which may temporarily lower your score.
Having a sizable amount of outstanding school debt. Considerable debt might lower a person’s credit score. As a result, your debt-to-income ratio may rise, which is terrible news.
Repaying a loan. Your credit score may temporarily dip after you repay your college loans. This could be a problem if you only have one installment debt, like a student loan.
The Positive Effects of Student Loans on Credit
While it’s ideal to graduate college debt-free, the reality is that many of us require student loans to make ends meet. If you want to increase your credit score while making use of student loans, try the following strategies:
Make a habit of timely payments. A higher credit score may be yours if you maintain a good payment history. When you sign up for automatic payments, you won’t even have to think about your bills anymore.
Create a balanced credit profile. Lenders may feel more confident in your debt-management abilities if they see that you can handle fixed-rate installment loans and revolving credit like a credit card.
Develop a more extended credit history. Lenders also consider borrowers’ credit histories with other criteria. This is why timely payments toward the principal over a prolonged period can positively affect a credit score.
Avoid getting a cosigner. Your credit score won’t be significantly impacted by this inquiry. In contrast, if you apply for a federal student loan on your own, you won’t be putting a loved one’s or friend’s credit in jeopardy if you can’t make your payments or fail.
