President Biden has finally announced his plans for widespread student loan forgiveness, wiping out up to $20,000 per person balances of millions of borrowers.
Student loan debt can be a major financial hurdle that plagues borrowers for decades, making it harder to buy a home or start a business. Lenders will want to assess your existing financial obligations before offering any type of credit, and heavy student loan repayments can complicate matters.
Removing some of your student loan debt will improve the situation and will likely have a positive effect on your credit score. However, since student loans are “installment loans,” meaning they must be repaid over a set period of time with regular payments, they don’t weigh heavily on your overall credit score.
Your credit score will have a credit utilization rate, which is the proportion of your available credit that is currently being used to fulfill existing obligations. The utilization rate represents up to 30% of your score.
Do student loans have a positive or negative impact on your credit score?
Student loans, like most forms of credit, can have either a positive or negative effect on your credit score. A credit score is a measure of your ability to manage your finances and reliably repay any obligations you have incurred.
Since student loan debt often reaches six figures, it’s important to show that you can keep up with regular repayments.
Gregory Poulin, co-founder and CEO of student loan repayment company Goodly, says student loans can have a positive effect on three of the five factors considered in credit score assessments: payment history; length of story; and the composition of credit.
So what do these three terms mean? a positive payment history is the most heavily weighted of the five credit score factors, accounting for 35% of your overall score. Ensuring you make your payments on time is essential to establishing a positive score, but there are some tricks you can use to further boost your credit.
Many lenders offer the option to start paying off your student loan sooner than expected. You can also start the process with a few small payments during the grace period after graduation, as little as $25 per month to show a willingness to transfer the debt.
establish your credit term is also important and represents 15% of your FICO score. In most cases, college students will have little or no credit history aside from their student loan. For borrowers with a limited credit history, establishing a flow of credit as early as age 18 can have a huge impact on their credit score.
Lenders also like to see diversity in your borrowing history, to prove that you are able to meet a variety of different financial obligations. Your credit combination represents 10% of your credit score and is one of the easiest to improve quickly.
Showing that you can handle a combination of credit cards, car loans, mortgages, and student loans will make it more likely that the next lender will consider your application favorably. But only if you have managed to fully meet your existing obligations.