Student loans and your credit score

With college tuitions rising by up to ten percent in 2004 alone, you may be thinking of taking on a student loan to help with the finances.

Your student loan will likely be the largest debt you’ve ever had -- possibly also the first. How you handle your student loan can have a huge effect on your credit rating and, since your credit rating determines how much you can borrow for years to come, your financial future.

Your credit rating reflects the debts that you have and your repayment history. The key to a good credit rating is to make regular payments on time and pay off your debt as quickly as possible. With careful planning and financial responsibility, you won’t feel overwhelmed by your student loan. Here are a few tips to help you effectively manage your debt.

Make interest payments
If you have obtained an unsubsidized government or bank loan, you may have to make interest payments while you are still in school. Factor this amount into your monthly budget and make payments on time.

You may have the option to defer the interest payments, adding them to the principal amount due after graduation, but try to avoid this. The interest will add up quicker than you think.

Use the grace period
Upon graduation, you usually have a six- to 12-month grace period before you start repaying your loan. This time is designed for you to find a job that affords you some financial stability. If you get a job before your grace period is up, put some money aside and make a large payment into your loan to start off on the right foot.

Pay it off as soon as possible
Most student loans give you 10 years to repay. The monthly payment that your lender requires is based on this timeline. If you can afford it, increase your monthly payment and pay your loan off sooner. Also, if you get a tax refund or bonus check, use it to make an extra payment toward your principal.

By paying more than the minimum payment, you will reduce your debt and pay off your loan faster. Not only will this lower the total interest you pay over the life of your loan, it will have a positive effect on your credit score.

One caveat: Interest rates for student loans are usually lower than for other types of debt. If you are carrying a significant amount of more expensive debt, such as from credit cards, put the extra payments toward that debt first. You’ll save money on interest in the long run.

Don’t skip payments
Contact your lender immediately if you’re having trouble making your loan payments. By communicating with your lender, you show a desire to cooperate, which makes lenders more willing to work with you to find a solution. You may be able to arrange an alternative repayment plan with lower payments and a longer-term loan. You may also be able to defer payments for a few months, but remember your loan may continue to accrue interest.

If you can’t afford to pay the full amount, make a smaller payment to show a good faith effort. If you skip payments, your loan will be considered delinquent. This will show up as a negative mark on your credit report.

When you repay the loan, your credit rating should improve, but your missed payments will still be on your record.

Never default
Defaulting on your student loan can leave a stain on your credit history for up to seven years after your loan is paid in full. When you default, collectors will hound you for payments and may eventually seek legal action. Your lender can garnishee your wages and your tax refunds in order to repay the loan.

If you declare bankruptcy, keep in mind that your student loans are not always forgiven. Government loans may still have to be repaid. A bankruptcy also remains on your credit report for seven to 10 years.

As with any money you owe -- be it a credit card balance, a student loan or a mortgage -- your best bet is to make regular payments and try to pay the balance off as quickly as possible. Not only will this improve your credit score, but you’ll also sleep better knowing the debt is off your shoulders.

 

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