Many college students and their parents have either been through or will be going through the process of opting a student loan, as a support for their educational expenses. Whether you are a student or a parent, it is important to understand that the loan you take today can influence your ability to opt for future loans or credits. Besides the obvious benefit of paying for your education, a student loan is a good opportunity to build your very own ‘credit score’ from scratch.
In case you are wondering why you need to have a ‘credit score’ at all, then know that a credit score is a numerical representation of your financial credibility; It greatly impacts your ability to borrow in the future. Lenders view your credit score as a tool to establish whether you are eligible for a loan before they hand you over the money. Thus a student loan is a great start to building your own credit profile. In order to build a strong financial character, you need to know the various effects a student loan can have your credit score.
1. It will open your credit file
Most parents/guardians manage to pay for their kids’ schooling with their existing income. College is the time when you may first contemplate opting a loan considering the fees and other expenses. A student loan then is your debut into the ‘world of credit’ and a beginning of your credit history. Your credit file will open with all the four credit information companies.
2. It will add length to your credit history
One of the deciding factors in calculating your credit score is the credit age, and age comes with credit history. The longer your history, the higher your score will be. Taking a loan at a young age gives you an opportunity to steadily build your score till the time you start applying for credit cards and additional loans.
And even though your account will close after complete repayment, your record stays on the report for several years giving testimony of your credit conduct.
3. On-time payments can keep your score growing
When you are prompt in paying your installments on time, nothing like it! This is the fastest way to enter into the good books of money lenders. You are potentially creating better chances for yourself for a loan or a credit in the future. After all, the only thing that concerns lenders is getting repaid and on time.
Note that there could be times when you may not be able to pay your installment due to some reasons. There is an option deferring your installment by requesting the bank. Once your bank approves, you eliminate the risk of harming your credit score while also heaving a sigh of relief.
4. Late or missed payments mean quick damage
While good conduct requires a long time to establish your good behavior, one delinquency is quick enough to pull your score down. Hence, it is always recommended to either pay on time or report to the bank in case of late payment. However, there is also an understanding that most lenders do not immediately report your late payment and generally give you a grace period of 60 days.
5. Help create credit mix
Credit mix simply refers to the mixture of credit you have such as credit cards, home loans, auto loans, etc. Having a student loan can add variety to your credit profile. Credit mix is something lenders appreciate. This helps boost your credit score. If you want to see how your credit report looks like or want to find out your personal credit score, you can check one for free from CRIF High Mark.
Building credit can play an important part in your financial and personal life. A high score can make qualifying for new loans or credit cards easier, may save you money with lower interest rates or insurance premiums and potentially help you secure your future.
