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If you’ve got student loans, you’re probably wondering how to best manage your loan payments. We’ve all heard the horror stories of people who are too far in debt to get out, and trying to avoid that situation is paramount—but there’s also the question of whether or not paying back your loans will help you build credit.
The answer, as it usually does, lies in the details. To find out what sort of impact your student loans have on your credit score and to discover a few ways to pay them off faster, keep reading!
Does Paying Back Student Loans Build Credit
For many young people, student loans are unavoidable. There is more than $1.5 trillion in outstanding student loan debt in the US, a number that continues to rise as college costs increase and more students enroll in higher education.
While they can be imposing debts for those just starting out in their careers, student loans could offer an opportunity to build your credit history.
Here’s how student loans influence your credit, for good and for bad — with tips on how to leverage your student loans to enhance your credit history.
How student loans can hurt your credit history
Student loans can negatively impact your credit score if you fail to pay them off in a timely manner.
Even a single missed payment can significantly decrease your score, and any negative payments could stay on your credit report for up to seven years.
Failing to make student loan payments may harm your credit
The influence of payment history on your credit score cuts both ways. While making regular debt and credit card payments may help boost your credit score, failing to make your scheduled payments can substantially lower your score.
Defaulting on your student loans has a major negative credit impact.
From a credit score perspective, the only thing worse than missing a loan payment is defaulting on the loan entirely.
Federal student loans move into default 270 days after the first missed payment. Other types of loans may even go into default sooner, so be sure to read your loan agreement to find out how many missed payments could lead to a default. As described by the Department of Education, the consequences of a student loan default are severe. Apart from significantly damaging your credit score, a defaulted loan could lead to having your wages and tax returns seized to pay off the loan, and a defaulted loan may persist for up to seven years on your credit report.
How student loans can help your credit history
Student loans offer an opportunity to show that you can make regular payments on your debt — the main component of your credit score and a sign that you are a responsible credit user. Student loans can also help your credit by boosting your average account age and diversifying your account mix.
Student loans allow you to make positive payments
Payments against open loans or lines of credit are reported to the three main credit bureaus and become part of your credit report. When on-time payments land on your credit history, your credit score can grow. So when you make regular payments on your student loans, your credit score could improve.
Payment history is one of the important components of your credit score under both the VantageScore® and FICO® score models.
Because payment history is so influential on your overall credit score, it’s important to make all of your scheduled payments on your student loans.
Student loans increase your average account age
Average account age, also known as the length of your credit history, accounts for a portion of your VantageScore® or FICO® score.
When you have a long history of responsible credit use, you’re seen as a lower risk to lenders than someone with a shorter credit history. Paying back your student loans over many years increases your average account age, helping you demonstrate financially responsible behavior.
Student loans expand your credit mix
The final factor that student loans affect your credit score is the credit mix: that is, the diversity of credit you have in your portfolio. Account mix contributes to your overall VantageScore® or FICO® score.
If you have multiple kinds of credit in your name — one or more credit cards, a home loan, a personal loan, or student loans, for instance — you are seen as someone who can manage many different demands in your financial life. By reducing your perceived risk as a borrower, a better credit mix could help to increase your credit score.
Should you consider paying a student loan with a credit card?
If you pay your student loans with a credit card using an intermediary, there are some important factors to consider. Making student loan payments on a credit card can have negative consequences, so it’s important to be aware of how this could affect your overall finances. You may:
- Increase your credit utilization ratio. This factor, which refers to the amount of your available credit that you use from month to month, represents about 20% of your credit score. The more you put on your card(s), the higher your utilization ratio, which can dent your score in the short term.
- Accrue more interest if you carry a credit card balance. Credit cards can have much higher interest rates than student loans. If you don’t pay your monthly card balance in full, you could accrue interest rapidly — and even begin paying interest on the accrued interest.
- Limit flexibility for other spending needs. One of the primary benefits of a credit card — the ability to make large purchases — is reduced if you put hundreds or thousands of dollars of monthly student loan payments on your card.
- Spend more overall. Even if you do everything else right, you may still have to pay fees to your lender for using a credit card. If this fee exceeds the rewards you get on your card, you’ll end up losing money.
Benefits of paying a student loan with a credit card
When you make student loan payments with a credit card, you may:
- Enhance your payment history. If you make timely student loan payments with a credit card and then pay off the card balance on time, you can get more positive payments on your credit history.
- Diversify your credit mix. A mix of loan types and credit is better for your credit score than a more homogenous borrowing portfolio.
- Potentially gain rewards through your credit card. If you have a rewards credit card, you may accrue rewards by adding student loan payments to your card balance. Be sure to verify with your credit card provider to make sure if you do pay off your student loans via the credit card, you earn points for this expense.
Student loan tips for building your credit history
To keep your credit history moving in the right direction, be sure to take steps to build and maintain your credit through student loans.
Only take out student loans as needed
The best way to keep your student loans manageable is to limit what you owe. While it may be tempting to pay all of your education expenses with loans, consider only using them as you must to cover tuition, school fees, and books, while avoiding using loans to afford rent or groceries.
Maximize the value of federal student loans
There are two main types of student loans: federal and private. Federal loans come with several benefits, including the potential to defer interest accruals, the ability to consolidate what you’ve borrowed, and even forgiveness of some or all of what you owe. Private loans, on the other hand, are provided through non-government affiliated issuers and may have narrower terms and agreements than federal loans.
Make regular payments
Whichever version of your credit score you are looking at, your track record of making payments is highly influential. It’s simple: making regular payments on your loans and credit cards could boost your score. Failing to pay what you owe may hurt your score.
Stay in close communication with your lender(s)
If you’re struggling to make your payments, contact your lender. You may be able to defer your payments, negotiate a repayment plan based on your income or consolidate your loans under a single interest rate. Even private lenders will typically work with borrowers to ensure they can make their payments.
best way to pay off student loans for credit score
1. Make extra payments the right way
There’s never any penalty for paying student loans early or paying more than the minimum. But there is a caveat with prepayment: Student loan servicers, which collect your bill, may apply the extra amount to the next month’s payment.
That advances your due date, but it won’t help you pay off student loans faster. Instead, instruct your servicer — either online, by phone, or by mail — to apply overpayments to your current balance, and to keep next month’s due date as planned.
You can make an additional payment at any point in the month, or you can make a lump-sum student loan payment on the due date. Either can save you a lot of money.
For example, let’s say you owe $10,000 with a 4.5% interest rate. By paying an extra $100 every month, you’d be debt-free more than five years ahead of schedule, if you were on a 10-year repayment plan.
2. Refinance if you have good credit and a steady job
Refinancing student loans can help you pay off student loans fast without making extra payments.
Refinancing replaces multiple student loans with a single private loan, ideally at a lower interest rate. To speed up repayment, choose a new loan term that’s less than what’s left on your current loans.
Opting for a shorter term may increase your monthly payment. But it will help you pay the debt faster and save money on interest.
For example, refinancing $50,000 from 8.5% interest to 4.5% could let you pay off your student loan debt nearly two years faster. It would also save you about $13,000 in interest, even with payments that stay about the same.
You’re a good candidate for refinancing if you have a credit score in at least the high 600s, a solid income and a debt-to-income ratio below 50%. You shouldn’t refinance federal student loans if you want or need programs like income-driven repayment and Public Service Loan Forgiveness.
3. Enroll in autopay
If you don’t want to refinance your loans, signing up for autopay is another potential way to lower your student loan’s interest rate.
Federal student loan servicers offer a quarter-point interest rate discount if you let them automatically deduct payments from your bank account. Many private lenders offer an auto-pay deduction as well.
The savings from this discount will likely be minimal — dropping a $10,000 loan’s interest rate from 4.5% to 4.25% would save you about $144 overall, based on a 10-year repayment plan. But that’s still extra money to help pay off student loans fast.
Contact your servicer to enroll or find out if an autopay discount is available.
4. Make biweekly payments
This simple strategy is a way to trick yourself into paying extra on debt: Pay half of your payment every two weeks instead of making one full payment monthly.
You’ll make an extra payment each year, shaving time off your repayment schedule and dollars off your interest costs. Use a biweekly student loan payment calculator to see how much time and money you can save.
5. Pay off capitalized interest
Unless your loans are subsidized by the federal government, interest will accrue while you’re in school, your grace period, and periods of deferment and forbearance. That interest capitalizes when repayment begins, which means your balance grows, and you’ll pay interest on a larger amount.
Consider making monthly interest payments while it’s accruing to avoid capitalization. Or make a lump-sum interest payment before your grace period or postponement ends. That won’t immediately speed up the payoff process, but it will mean a smaller balance to get rid of.
6. Stick to the standard repayment plan
The government automatically puts federal student loans on a 10-year repayment timeline, unless you choose differently. If you can’t make big extra payments, the fastest way to pay off federal loans is to stay on that standard repayment plan.
Federal loans offer income-driven repayment plans, which can extend the payoff timeline to 20 or 25 years. You can also consolidate student loans, which stretch repayment to a maximum of 30 years, depending on your balance.
If you don’t truly need these options and can afford to stick with the standard plan, it will mean a quicker road to being debt-free.
7. Use ‘found’ money
If you get a raise, a student loan refinances bonus, or another financial windfall, allocate at least a portion of it to your loans. Consider using this breakdown: 50% of the extra income can go toward debt, 30% to savings, and 20% to fun, discretionary spending.
Some companies pay off student loans as an employee benefit. Find out if your company offers an employer student loan repayment program, and be sure to enroll.
You can also start a side hustle to pay off student loans fast. Sell items like clothing, unused gift cards or photos; rent out your spare room, parking spot, or car; or use your skills to freelance or consult on the side.v
Consider setting up rules for yourself, like putting any $5 or $10 bills you receive toward your loans. Some money-saving apps, like Digit and Qapital, will help you set savings goals and rules as well.
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