How Do Student Loans Affect Credit Scores?
Congratulations are in order for the graduating class of 2014. With a degree in hand and job opportunities around every corner, we wish you the best of luck as you take the next step in your career.
As you start your new career and enjoy the financial benefits of earning a salary, it’s important to make a budget, live within your means and use credit wisely—especially if you’re saving up to get your own place.
That’s why we’ve invited our partner Dave Sullivan of Credit Technologies to share how you can get ahead financially, even if you’re starting out with student loan debt.
As a credit service provider, I often get asked, “Do student loans affect credit scores?” The short answer is yes, any loan you take out will have an affect on your credit score. However, the way you manage your student loan debt will determine how much of an impact it will have on your credit score and your ability to buy a house down the road.
Whether you’re a recent (or not so recent) grad, here are four ways to keep student loans from negatively affecting your credit score:
- Get a consolidation loan. Unlike other types of installment loans, such as car loans, you will probably have more than one student loan on your credit report. Because student loans are usually granted each semester, it’s not uncommon for college students to graduate with several loans that have high balances. The best thing to do in this scenario is get a consolidation loan from the organization that manages your student loans. Instead of having several loans with high balances, only one loan will appear on your report, which will help your credit score considerably. The FICO scoring model considers the number of open and active accounts when calculating your score. If you have many accounts with maxed out balances, you are ranked lower than if you only have one account that is maxed out—even if you have the same debt load.
- Ask for a deferment. Once you’ve consolidated your student loans, ask about obtaining a deferment. This allows you to temporarily postpone your student loan payments and can come in handy when applying for a mortgage. The degree to which student loans will affect a mortgage application depends on what type of financing you’re applying for. Although conventional mortgage loan programs take student loan payments into consideration whether they’re deferred or not, FHA and VA loans exclude student loan payments from your debt-to-income (DTI) ratio, as long as your loan is deferred at least 12-months from the date of closing.
- Maintain good credit habits. The best way to build strong credit and get the best score possible is to use credit wisely. Pay your bills on time, keep your credit card balances low and avoid applying for multiple credit cards at one time. If you’re starting from scratch and have yet to establish a credit history, there are many different ways you can start building your credit. If you plan on buying a house within the next six months, avoid making these 10 common credit mistakes to improve your chances of getting approved for a mortgage loan.
- Make a budget and stick to it. As you make the transition from college student to self-sufficient adult, make a budget and stick to it. Take a look at your income and figure out how much money you need to allocate toward bills each month. Spend the money you have leftover wisely, and make sure to set aside money to save each month. If you develop financially responsible habits early on in your career, you’ll set yourself up for success later on in life.
Are you a recent grad with a question for Dave? Connect with him on Facebook or leave a comment below!
With more than 20 years of experience providing state-of-the-art credit reporting solutions to financial institutions and mortgage lenders, Dave Sullivan has established his reputation as an industry expert. In addition to serving as the Marketing Director for Credit Technologies and on the Board of Directors of the MMLA, Dave enjoys providing credit tips on his weekly video blog, http://www.thecreditguy.tv.
