How do student loans affect your credit score?

Student loan, like a car loan or mortgage, operates like and installment loan. The loan receiver repays the principal amount, with the calculated interest, over a certain time frame. Unlike our credit card account, which can be kept open for future use, once the installment loan is paid off, the account is closed. Your-to-income ratio, the amount of debt you can carry as compared to your overall income which affect your option to obtain new credit if it is high, can be affected by your student loan.

Your student loan becomes a permanent part of your payment history, which is the biggest element considered during the calculation of your credit scores. It is important to know when your first payment is due, but first you need to decide which repayment plan suits you.

Your minimum monthly payment will be determined by the choice of the payment plan, so the information about what you can afford to pay and how the payments will eventually affect your credit score, is very important. It is a very good habit to make on-time payments every month, but if your payment plan is such that the payments per month are so low that the original amount you borrowed is not lowering or the monthly payments are so high that you are not able to make the payments monthly, then you need to choose other options.

Many borrowers mainly use student loan to prove that they can pay back loans responsibly rather than using the student loans as an opportunity to get an education. Making on-time payments and paying off student loan debts are one of the most important steps in building a healthy credit and thus playing a concrete foundation for your financial future.

If before, you only used only one type of credit, like a credit card, then having a student loan is good for your credit score because it helps your credit mix. But you have to keep in mind that this effect is very small and it is not worth taking out a loan that you cannot afford to pay back for just a small fraction of increase in credit score and to have a mix of credit types.

Student loan taken by a parent to support his child’s education, only affects the credit score the parent. If a student loan you take out and your parents co-signed, then on the other hand, it appears on both the parents and the child’s credit files and can affect scores of both them. This is a huge step for the parents because their credit score is being affected without their contribution in it. If the child responsible in paying the installment on time every month and he pays off the capital amount + the calculated interest with in the basic time frame, then the credit score of the parents will increase. On the other hand, if the child is irresponsible and is frequently late on his monthly payments, then the parents will also suffer and their credit score is being affected without there say in it.

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