Your credit score falls if you fail to fulfill your obligations. Paying late will hurt you. Student loans, however, may give you a little more time before your blunders are reported to the bureaus. Here is how they affect your status in 2021.
Keep an Eye on Your Reports
These loans are installment-based. It means you pay a particular amount over a certain period. As the lender shares their data with credit reporting agencies, your borrowing history is tracked. To avoid problems, you should pay on time, every time.
Keeping track of your history is crucial. Sadly, millions of Americans find mistakes in their own reports. Almost 5 million borrowers paying federal student loans saw their credit scores drop in March 2020 due to the errors made by Great Lakes Higher Education Corp.
False derogatories, from missed payments to evictions, pull the credit score down. This affects many aspects of our lives. Aside from lenders, employers, insurers, and landlords — all rely on FICO, VantageScore, and other report-based formulas to compare applicants. This explains why credit fix companies are thriving.
However, they are not created equal. To choose wisely, consider BBB ratings, customer feedback, and expert reviews on sites like Investopedia. For example, does Lexington Law really work? Comparing companies is difficult if you have little experience in the field.
Reliable firms remove reporting errors as fast as possible. If the details of your student loan are inaccurate (for example, there is a false late payment, or you never took out the loan), disputing is possible and necessary. This will give your score a boost.
Where to Find Your Reports
Every citizen of the United States may collect their own credit reports for free. Until April 20, 2022, this service is provided weekly. Check your records stored by TransUnion, Experian, and Equifax at once. All three documents matter as your lender may share information with any of the bureaus.
Go to www.annualcreditreport.com and submit your request online. You can download the data instantly. The organization may also be contacted by phone or mail. In this case, the results will be provided within 15 days.
Note that your records are updated every week. Take advantage of the current opportunities and collect them frequently. Previously, you could only do it for free once a year.
Have You Missed Your Payment?
Any borrower can forget to make their next payment. If the delay is only brief, it may not affect your score at all. Make the payment as soon as you can, and contact the lender. Ask them not to report your mistake. This may or may not work, but it is still worth trying.
The idea is to prevent the event from being reported. Every lender will share this information with one or more credit bureaus after 30 or 90 days (for federal and private loans, respectively). However, if they agree not to inform the agencies, you may still be charged late fees.
Once the payment is reported, it becomes derogatory on your credit report. It will then stay on the records for 7 years, pulling the score down. As you can see, paying as soon as possible is absolutely crucial. To avoid the same mistake in the future, set automatic reminders.
The longer your payment remains overdue — the more damaging it becomes. For example, those who take out a federal student loan and fail to make a payment for 270 days end up with the default. It is immeasurably worse than a 30- or 90-day delay.
What If I Cannot Pay?
If you cannot make your next payment due to financial difficulties, communicate with the lender immediately. Do not keep them in the dark. If you simply ignore their demands, the consequences will be dire.
Negotiate with the provider. Ask them to reduce or pause your monthly payments. The following options may be available:
an income-based repayment plan (federal loans only);
a modified payment plan (for private loans, availability depends on the lender);
deferment/forbearance to pause payments temporarily.
If you act fast and the terms of your loan agreement are modified, this will not affect your score. What really matters is your ability to handle payments as agreed.
How to Build Credit
Paying on time is the most influential factor for your credit score. It determines 35% of your total in FICO and 40% in VantageScore. You cannot get traction without on-time payments. A student loan is a way to build credit.
If you have only had a credit card before, this is also favorable for your credit mix. It is another score factor (albeit less important). The more different types of borrowing are used — the better.
Finally, note that if the loan was taken out by your parents, it does not affect your own credit. This is true for private parent loans and federal parent PLUS loans. However, if your parent only co-signed the agreement, it will affect your own score, too. In any case, refinancing parent PLUS loans can be convenient if you’re looking to qualify for a lower interest rate and pay your loan faster.