With the exit of Labor Day, summer has officially come to a close. For hordes of young Americans, this means one thing: back to school. Back to late night cramming, ramen dinners, and hopelessly worrying about how student loan debt will annihilate your credit score come post-graduation. But before you start to panic, let’s take a look at some of the facts about student loans and your credit score.
Credit History 101
First, lets take a look at how FICO actually works. What exactly is your credit score? Where does it come from? Back in the 1950s Fair Issac and Company (FICO) introduced an algorithm to decide how risky it is to lend money to an individual. They based the algorithm on five categories: Payment History (35%), Amounts Owed (35%), Length of Credit History (15%), Types of Credit in Use (10%), and New Credit (10%).
The three major reporting credit bureaus (Equifax, Experian, and TransUnion), use FICO developed software along with you personal information to generate a credit score for you. The scores can range between 300 to 850, and are always changing based upon your credit history.
Student Loans DON’T Automatically Drop your Credit Score
A common misconception about student loans is that they will automatically destroy your credit score. This is not true. In fact, approximately 7% of consumers with at least $50,000 of student loan debt have FICO scores in the 800s. That’s correct, the 800s! Remember, 35% of your FICO score is based off of payment history accounts (See above). As long as you are making on time payments, student loans can actually help generate a good (if not great) credit score.
Managing Your Student Loans
For most people, it’s just a matter of “how to manage student loans correctly”. One would think paying them off ASAP would be best for your score (it’s not). Paying off student loans too quickly can actually have negative impact on your credit score. On the flip side, you don’t want to pay the minimum every month either, doing so will imply that you are taking too much time to pay off the debt. You want to find the sweet spot in between to make sure your debt will not hurt your credit.
It’s always good to minimize your student loans the best you can. You can do this by taking AP courses in high school to knock out the basic classes. Applying for scholarships, attending community college, and putting money away into a savings account can all help minimize your student loans before you apply.
Avoid Missing Payments
ALWAYS ALWAYS ALWAYS pay on time! Just a single late payment can linger on your credit report and haunt you for YEARS. In the cell phone age we live in today, it is ideal to set reminders on your phone’s calendar or email. Make sure you don’t default on your loans. Defaulting can lead to garnishments, which will obliterate your credit report. Times can be tough and if your payments are taking too big of a toll on you, try reaching out to the lender to negotiate.
Know What’s on Your Report
Finally, it’s always good to know what’s on your credit report before you apply for the loan and after you graduate. The bureaus make mistakes too and you need to make sure everything is reporting correctly. You can always obtain a free credit report online and ask the experts at Better Qualified to help give an overview of your credit report.