The Potentially Huge Impact of Student Loans on Your Credit Score

03/24/2015 03:03 pm ET | Updated May 24, 2015

You don't have to search very hard to come across the dire stories of real people struggling with poor credit scores. Though most people are aware that their credit score is important -- it can affect your ability to rent apartments, get a mortgage or car loan, or reduce your student loan interest rates -- there are many myths surrounding what can actually help or hurt your score, especially when it comes to student loans. For recent graduates, student loans can be a credit disaster or a credit booster -- it all depends on how well they are managed.

How student loans can improve credit

If payments are made consistently on time and in full, then having student loans can help strengthen your credit and raise your credit score. These timely payments contribute to your payment history, which makes up 35 percent of your credit score. Student loans can also help improve credit scores for young graduates by helping to increase the length of credit history (15 percent of score) and adding to types of credit (10 percent of score), two credit score categories that young people are often weaker in.

How student loans can hurt credit

Just like how consistent on-time payments can improve your credit score, a history of late payments can reduce your credit score. Being a day late on a payment is not a disaster, and likely won't factor into your credit score, but all payments over 30 days late are reported to the credit bureaus. These late payments will remain on your credit report for seven years, and can dramatically lower your credit score.

Loan deferment and forbearance, on the other hand, do not hurt your credit score, and can be a useful tool to avoid all the penalties associated with late payments. However, loan defaults stay on your credit report forever and will have a negative effect on your credit score, and therefore should be avoided at all costs.

How cosigners may be affected

Graduates who fail to manage their student loans effectively won't just be hurting their own credit scores, their co-signer's score can be affected as well. As a cosigner, they are not only agreeing to pay the debt if the graduate can not, but they are also exposing their credit to the effects of the borrower's late or incomplete payments. Cosigners may see an impact on their credit score if their borrower has missed a payment. It is important to be aware of your exposure as a cosigner, so check in regularly with your borrower and make sure payments are being made on time and in full.

How to take advantage of your credit score

Your credit score is a number on a range from 350-850. Generally, a strong credit score is above 700, with the best financing options offered to those who hold scores above 800. If you have worked hard to establish excellent credit, student loan refinancing may be a great option for you. Borrowers with strong credit can be rewarded with the lowest rates on the market, which can reduce their monthly repayment significantly. Reducing your monthly payment will also help you stay in good financial standing, and help you save for your next life milestone.

How to avoid pitfalls

If you are having trouble paying your student loans and want to avoid hurting your credit score, you can reach out to your lender and see if you qualify for deferment or forbearance. You can also see if you qualify for an income-based repayment plan, or look into refinancing your loans to get a better interest rate or term. There are many forgiveness options and other resources available, but ultimately it is up to you to manage your student loans effectively and avoid the potential negative effects mismanagement can have on your creditworthiness.

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