Student Loans and Credit Scores – A Powerful Combination




Finding It Increasingly Difficult to Pay Your Student Loans?


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By now everybody is familiar with the problems caused by student loans, whether you graduated recently or years ago. But we often ignore how student loans affect credit scores. Mismanaging your student loan can seriously affect your credit score, making it harder to buy a car, get a mortgage and so on. Here is how your student loan can impact on your credit score and how you can manage your student loan effectively.

Determining Your Credit Score

The FICO score is the primary credit score and it is calculated based on five factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and type of credit used (10%).This score is unique and depends on one’s financial circumstances.

Importance of a Good Credit Score

A healthy credit score means you get better terms whenever you borrow money, for example when taking out a mortgage or car loan.It may even have an effect on your ability to get employment.So if you are finding it hard to manage your student loan and it is affecting your credit score, this could lead to getting bad term loans. For example, if you take a 10,000 loan and your FICO scores are between 720 and 850, you may pay 3.38% interest per year, which works out to a monthly payment of $292.But a score of 500 to 589 for the same loan may mean an interest rate of 16.92 % per year and a monthly payment of $356.

Student Loan Delinquency and Credit Scores

Student loans start hurting your credit score when you miss payments since it basically means you have violated the promissory note you signed with the lender.

Fortunately, the delinquency status begins to hurt your scores if they are outstanding for 90 days. Failing to correct your status within 90 days means your lender will report it to the credit bureaus, and this is when your credit score will be hit for the first time. A lowered credit score makes it hard to rent an apartment, procure employment, take out a mortgage or car loan or get a cell phone contract.

Even where you get these things, it will be on unfavorable, expensive terms. As such, it is vital to take the initiative whenever you miss a payment or you expect to miss a payment in the future.

Student Loan Default and Your Credit Score

After a continued delinquency of 270 days, your loan moves to default status- with far more severe consequences.If it is a Federal Family Education Loan (FFEL) that is paid quarterly, the loan status changes to default after 330 days. Besides your credit score taking a hit, other effects of a default status include:

-the loan becomes ineligible for forbearance, deferment, and other repayment programs.

-you may get a wage garnishment.

-tax refunds due to you may be withheld.

-you can become ineligible for federal and state assistance.

-your loan account is transferred to a debt collection agency.

-right away, you become liable for the whole unpaid loan plus any collection fees.

Evidently, defaulting on a student loan has serious consequences and it has a significant impact on your credit scores.

Protecting Your Credit Score From Being Affected by Your Student Loan

There are a number of ways that people can use to stop student loans from harming their credit scores. The important thing is to communicate with lenders and act promptly.

Instead of delaying payment until a loan reaches delinquency, it is worthwhile to talk to the lender immediately you realize that you could miss making a payment. Based on the loan type, the consumer can avoid repaying as a result of military service, economic distress, unemployment and other kinds of deferment. The majority of these programs go on for three years, where the principal and interest payments are frozen during this period. Acting fast and contacting the lender may translate to huge savings and prevent damaging one’s credit score.

If you are not eligible for deferment, you may opt for forbearance. This enables you to halt payments or reduce your repayment for a maximum of one year. Here, the interest will still grow but you will not have to pay in full. There are several grounds for qualifying for forbearance. One of them is that you are using over 20 percent of your income each month to service student loans.

In addition, there is the discretionary forbearance program where the lender has the discretion of extending the program if they are convinced that you cannot pay. You can then come to some kind of agreement with the lender regarding how you will pay.

To get help and prevent harming your credit score in case you run into problems, follow these steps:

-get in touch with your lender and explain your situation.

-check if your financial situation is covered under Federal deferment or forbearance requirements.

-in case it is not, talk to your lender about a hardship program or discretionary forbearance.

-enlist for a student loan counseling to learn about your options and maximize on your monthly budget.

Optimizing Your Student Loan to Build Up Your Credit History

Sometimes you can even use student loans to improve your credit score. If you able to pay consistently, this can result in a huge boost to your credit score over the duration of your student loan repayment. This means you avoid using harmful credit that comes with hidden fees and risky terms. It is even worthwhile to pay off your student loan early if you can manage it.This gives you a much better credit score.

Take-Home Message

In conclusion, student loans and credit scores are a formidable combination that can be used to your advantage. Neglecting your loans and not communicating with the lender can severely harm your credit score and lead to all manner of financial difficulties. At the same time, budgeting effectively and talking to your lenders promptly when you need extra assistance will ensure that your credit scores remain healthy. If utilized properly, the period after graduation can give you a sound credit history and make it easier to attain your life’s financial goals.

Student Advocates is a privately owned company that helps consumers like you identify government programs that may be suitable to your situation, gather the relevant application documents, and then prepare those documents for your review and submission.  Our services are reasonably priced and our goal is to take the frustration out of the process. If you have questions about your student loans, please feel free to contact us. We’d love to have the opportunity to help you in any way we can.

 

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