Does Paying Student Loans Build Credit?

Whether you’re just planning on going to college or if you graduated college and you’re about to start making payments on your student loan, you might be wondering whether paying your student loans builds your credit? We will discuss the answer to this question in much detail below.

Does Paying Student Loans Build Credit?

Yes, paying student loans builds credit. Whether you take out a federal student loan or a private student loan, your student loan will appear as an installment account on your credit report, meaning your account status will be updated with the credit reporting bureaus. Your payment history will be reported, so if you make payments, your payments will positively impact your credit score. However, if you fail to make payments on your student loan, your credit score will suffer.

We will now share a few reasons as to why your student loans will help you build your credit:

Payment History

As mentioned above, if you make your student loan payments on time, you will be helping your credit score. This is so because your payment history accounts for 35% of your credit score. So, if you’re paying your student loans in full and on time, you’ll be greatly helping your credit score and building your credit.

Credit Mix

However, your credit score will benefit for two more reasons. A student loan will build your credit because it diversifies your credit mix. The credit reporting bureaus reward those who have different account types, such as credit cards, auto loans, home mortgage, and student loans with a higher credit score because it shows them that you have experience handling different types of debt.

Account Balance

As you pay down your student loan account balance, you will be building your credit and improving your credit score. Whenever you reduce the amount of money that you owe on a loan, you’re improving your credit score. For example, if you have a loan in the amount of $15,000 and you’ve paid it down to $7,000, the reduction in balance as compared to the original loan amount will improve your credit score.

Account Age

Also, having a student loan builds your credit because it adds to your overall account age, the older your accounts, the more this factor will improve your credit score. Your student loans will appear as open accounts as soon as the student loan funds are dispersed to you. So, keep the accounts in good standing and you’ll build your credit.

Conclusion

Making on-time and complete payments on your student loan will help you build strong credit. By borrowing money for your education and repaying it on time, you’re demonstrating to future creditors and lenders that you’re able to borrow large sums of money and repay them on time. Lenders and creditors love to see that you’re able to repay the money that you borrow and will, therefore, be more likely to approve you for loans and credit cards at excellent interest rates.

Can a Student Loan Hurt Your Credit

By now, you probably know that a student loan can definitely help you build your credit, however, if not managed properly, a student loan can devastate your credit. A student loan appears as an installment account on your credit report. So, when the time comes to make payments on your student loan, you must make them as with any other type of loan. If you miss payments or don’t make them on time, you could cause significant damage to your credit score because everything is reported to the credit reporting bureaus.

Not making even a single payment could cause significant damage to your credit score, making it very difficult to be approved for loans and credit cards later down the road. So, it’s imperative that you treat your student loan seriously and make all of your payments on time. If you believe that your student loan payment is too high, you should contact your lender and negotiate a lower payment or ask for some assistance with repayment. Doing so will help you make payments on your loan and avoid ruining your credit.

With student loans, the problem could be compounded because although you make a single payment on your student loans, if you have taken out more than one loan, you will have multiple installment accounts that appear on your credit report. So, if you miss a single payment, you may be missing a payment on multiple accounts, which could have a devastating impact on your credit score and ability to obtain credit in the future.

If you miss to many payments on your student loans, you may go into default, which will cause more damage to your credit score and will allow your student loan providers to garnish your wages and take money from your tax returns to pay back your student loans. So, definitely make sure that you’re taking care of your student loan payments to avoid damaging your credit.

What Should You Do If You’re Having Trouble Paying Your Student Loans?

If you’re having trouble making payments on your student loans, you should not delay contacting your student loan provider. This is so because missing payments or becoming delinquent on your student loans will cause significant damage to your credit report and credit score. So, what should you do if you’re having trouble paying off your student loans?

  1. Contact your student loan provider – The first thing that you should do is to contact your student loan provider and talk to them about your repayment options. Some student loan providers will lower your monthly payment and extend the length of repayment. Most student loan providers will be willing to work with you to ensure that you make your monthly payments.

  2. Forbearance – If you have experienced a loss of employment or have medical problems and are therefore unable to make payments on your student loans, your student loan provider may be willing to place your account in forbearance, which temporarily suspends your duty to make payments on your loan. That said, while your account is in forbearance, interest will continue to accrue on your loan account.

  3. Deferment – If you have experienced a loss of employment or any circumstances that make it difficult for you to make payments on your student loan, some student loan providers will allow you to enter into deferment. Deferment is better in some circumstances than forbearance because interest does not accrue on your account while you’re in deferment. For example, if you’re on active duty in the U.S Military, you may qualify for deferment while you’re on active duty.

Defaulting on Student Loans

If you stop making payments on your student loans for a lengthy period of time, you will go into default. Usually, you are in default of a federal student loan when you stop making payments on your federal student loan for 270 days. However, you will go into default of private student loans much quicker. For private student loans, you will usually go into default when you stop making payments for 120 days.

That said, once you go into default, you will have already caused significant damage to your credit score as the late payments on your student loan would have been reported to the credit reporting bureaus.

However, the damage does not stop there. Usually, when you go into default, your student loan debt may be sent to a collection agency. The collection agency will then proceed to add a collection account to your credit report. The addition of a collection account to your credit report will further cause significant damage to your credit score.

After adding the collection account to your credit report, the collection agency will vigorously attempt to collect the outstanding debt from you. This applies to you whether you have a federal student loan or a private student loan.

If you have a federal student loan, the government may attempt to collect your student loan debt by garnishing your wages or collecting it from your federal and state tax returns.

If you have a private student loan, the private student loan provider may sue you in civil court and ask the court to garnish your wages as repayment for your outstanding debt.

The takeaway from all of this is that you should not ignore your student loan payments. You should do everything in your power to negotiate with your student loan provider on how to repay your student loan. All options that don’t involve you defaulting are better than defaulting on your student loan.

Credit Score Planet Frequently Asked Questions

1. Can paying off student loans help credit score?

Paying off your student loans will help your credit score. However, immediately after paying off your student loan, your credit score may drop a little bit. This is totally normal and should not alarm you. This happens because when you pay off your student loan, you’re essentially closing down an installment loan, which reduces your credit mix and can therefore cause a slight drop in your credit score.

2. Does paying student loans increase credit?

Yes, making payments on your student loans will increase your credit score and build good credit for you. However, if you miss payments on your student loan, you will cause significant damage to your credit score.

3. Is it worth paying student loans early?

Paying off debt is always a good thing. So, if you have the financial ability to pay off your student loans early, you should do it unless you’re making a large purchase, such as buying a home. This is so because paying off a student loan may cause a small and temporary drop in your credit score.

4. How does paying off student loans affect my credit score?

Paying off your student will establish good credit history for you. However, it may cause a small and temporary drop in your credit score. That said, the small drop in your credit score should not cause alarm as it’s totally normal for your score drop a little bit after closing down an installment loan account, such as a student loan.