5 Ways to Use Your Student Loans to Boost Your Credit Score
When used responsibly, student loans have a positive impact on your credit report. The first step is borrowing only what you need. The second step is using credit basics to make the debt a benefit instead of a hindrance. Learn how to manage your student loans to increase your credit score while diversifying your debts and gaining trust from lenders.
Here are five strategies for using student loans to fine-tune your personal finances:
Fatten your file. Credit reporting agencies like to see evidence that you can manage different types of debt. Student loans report as non-mortgage installment loans. A healthy credit file will contain a mix of installment loans and revolving credit, like credit cards. Other types of installment loans include mortgages and auto financing.
Build better habits. Payment history is the most influential factor behind your credit score, accounting for up to 35 percent of your score. Making timely payments every month will raise your score and convince other lenders that you're a safe bet. The opposite is also true. A single late payment will drop your score by several points and stay on your report for seven years. Thankfully, student loans have a variety of tools for dealing with emergencies. Be sure to contact your lender as soon as you're aware you'll have problems making a payment on time.
Age your account. One of the main considerations for your credit score is your average age of accounts (AAoA). This is the total amount of time between all of your accounts that you've had credit divided by the number of your credit accounts. If you've had a student loan for four years and a credit card for two years, the average age of your accounts is three years. AAoA accounts for up to 30 percent of your credit score. Because student loan repayment plans usually span several years, they help you establish a long payment history.
Leverage repayment terms to lower your monthly payments. Your credit score strongly considers the amount of money you make every month compared to your monthly payments. Debt-to-income ratio accounts for up to 30 percent of your score, so it makes sense to lower your minimum payments as much as possible. It's best to keep your combined debts—installment loans and revolving credit payments—under 30 percent of your income.
Pay down your balance. If you only make minimum payments, you may eventually be denied credit because of the 'proportion of loan balances to loan amounts is too high' exclusion. While the total amount of debt you carry won't have a negative impact on your credit score, lenders prefer to see non-mortgage installment loans paid down by 50 to 70 percent.
Many American consumers owe money on student loans. Just like mortgages, these loans don't have to be a black mark on your credit report. Paying them regularly gives you a chance to prove that you're responsible, but that isn't the only way your student loans impact your credit. To learn more, reach out to National FCG today!