One of the many financial concerns college graduates have is building credit after graduation. Student loans can have a significant impact on your credit score as a recent graduate. In a pre-Covid world, you would normally have a six-month grace period after graduation before mandatory repayment of your loans began. With the passage of the CARES Act, that timeline was altered, and all student loans are in forbearance until December 31, 2020. For more information about this, check out the resource below:
So, what happens when you finally enter the repayment period on your loans? How can you manage your student loan debt so that your credit score is helped rather than harmed? Are student loans affecting your ability to get other credit?
Pull Your Credit Report
The first step in taking control of your credit post-graduation is to pull a copy of your credit report. This will reveal everything about your current credit score and what impacts it, including information about credit cards, car loans and student loans. Many factors go into determining your credit score. Some of these factors include payment history, outstanding debt, credit history (how long you’ve had credit and how long specific accounts have been open), and any new credit you may have. Familiarizing yourself with what exactly is affecting your credit will help you figure out what steps you can take to begin improving your score.
Impact of Student Loans
Understanding how student loans affect your credit is important when you are seeking new credit to purchase a car or a home. Creditors look closely at debt-to-income ratio. A large amount of student debt can hurt your approval odds for new credit, particularly if you are in a low-paying job.
Another factor creditors look at is how much the principal balances of your loans have changed. If they haven’t changed much over several years, creditors may assume you’re not making much progress on paying down the debt you already have. As mentioned in the article referenced above, this could be a good reason to continue paying down student loans while they are in forbearance, if you are able, to make a larger dent in the principal balances of your loans.
Making Your Student Loans Work in Your Favor
The single best thing you can do to make sure student loans are working to improve rather than harm your credit is to make payments on time. Paying off your loans as fast as possible will help you greatly in the long run. Sometimes paying off loans early and closing those accounts can negatively affect your credit score since it may affect the length of your credit history. Don’t fret when this happens, as the dip in your score is usually temporary. Your score will likely stabilize in a few months.
Make sure to explore all repayment plan options available to you. Repayment plans like graduated-repayment plans and income-sensitive plans can improve your debt-to-income ratio by lowering your monthly payment now, based on your current income. There are pros and cons to plans like this, so always seek advice from a professional for your specific situation.
Additionally, you could talk to a professional about the possibility of consolidating your loans. While it doesn’t reduce the amount of your debt, a larger loan may offer a longer repayment term or better interest rate.
These are just a few ways you can be sure your student loans are helping improve your financial wellbeing rather than hurting it.
~ Hannah Bartlett
Any opinions are those of Hannah Bartlett and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notices.