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How do student loans affect my credit score?

Do student loans affect your credit score? Can you still buy a car, a house, or rent an apartment if you have tens of thousands of dollars in student loan debt? Those are the questions we are answering for you today, so whether you’re looking for answers about your credit score because you want to buy the latest iphone or maybe even a house one day, this is the show for you.

Hi everyone and thank you for tuning in to Ask Abby, I’m Abby, and this is our LIVE Facebook show where we answer all of your questions about finances. It’s a tricky time we live in right now and navigating your finances is hard so, if you have questions for me as we go along, please don’t hesitate to ask.

Today we are kicking off our student loan series and saying adios (for now, at least) to our credit score series with an awesome topic that combines both subjects. So, the question is… Do loans affect your credit score?

If you’re asking this question, you’re not alone. In fact, there are 45 million people in the US with student loan debt. And all that debt adds up to a whopping $1.6 trillion. That’s more debt than people have in their car loans and their credit card debt. So, that being said, help out those 45 million people by sharing this video and punching that like button for me!

Before we dive in, I just want to throw some links out there for those students wondering why the heck they need to be concerned about their credit score. You’ve classes to register for, books to buy, apartments to find, plus, you now have to figure out how to navigate college in the world of COVID-19. So, why should you care about your credit score? Well, I’ve got that answer for you in this video that I’ll put into the comment bar now.

On the other hand, if you’re watching the beginning of this video wondering what a credit score even is, watch this awesome video by the Basic Finance team. Then, come back and I’ll let you know how your student loans play into everything.

With August right around the corner, you’re probably finalizing your financing, which for the majority of students, means taking out some more student loans.

Here’s the good news: student loan debt isn’t all bad for your credit score. In fact, student loan debt can put you on the fast-track for building your credit score.

Here’s the bad news: regardless of whether or not you get a job using your degree after college, you still have to pay them back. And if you miss payments, your credit can suffer greatly.

So, do student loans affect your credit? The short answer: yes. But, like all of the other topics we discussed in the credit score series, there are so many factors that go into determining your credit score. Probably not what you wanted to hear, I know, but we will keep it really simple.

If you pay your student loan payments on time, your score will be positively influenced. Why? Because payment history is the number one factor in determining your score. It’s weight accounts for 35% of your credit score.  Plus, if you don’t have a credit card or car payment, it might be the easiest and only way for you to start building your credit in college.

In addition to affecting the payment history factor, student loans also positively influence the credit mix factor. For example, by the time you graduate, there’s a good chance you’ll have a credit card in addition to your student loans. Some students might also have a car payment and cell phone bill. If you play your cards right, treat your accounts with the TLC, and nothing crazy happens that’s completely out of your control – like a pandemic that halts the economy – you will have a great start to a healthy credit mix.

Credit history is also a winning situation. While you might not want to face it, there’s a good chance you’ll be paying off those loans for a long while. I hate to be the bearers of bad news, so we are going to graze right over the fact that the average borrower takes 20 years to pay off their student loan debt and talk about how positively it will impact your credit history. The longer an account is in good standing, the more your credit score will benefit!

So, those are some of the ways that student loans can positively affect your credit score. Now, can student loans negatively affect your score in any way? Well, yes. Of course, if you do the opposite of anything we talked about above – like you don’t make your payments on time or your accounts are in default – that will negatively impact your score.

But, consider the fact that it could take you 20 years to pay these bad boys off, how are lenders going to look at your when you go to purchase a house or a car? Well, the short answer is, that as long as your student loan accounts are in good standing, and have been that way for a while, you’re probably in good shape to purchase a house. In fact, first-time buyers in today’s world are often in a better financial state than those who were purchasing a home prior to the student loan crisis. That’s because today’s buyers are well versed in the world of on-time payments and accruing interest over the years.

Here’s why student loans COULD be a barrier if you’re looking to buy a home:

  1. You might have a higher DTI
  2. You might have a hard time saving for a down payment

Your overall credit plays a huge factor into making some of these big changes. During this series we are going to talk about ways to build your credit in college, what to do if your credit isn’t looking too hot or if you can’t payback your student loans right now because of COVID or some other contributing circumstances. Is the CARES Act going to help you? AND ALSO, for those parents out there wondering how Parent PLUS loans play into all of this, we have a show for you. We will answer all of these questions and more on this upcoming student loans series.

So, that’s all I have for you on this lovely Friday. Please, share this video so all the people with a piece of the $1.6 trillion pie can get started understanding their student loan debt.  Also, make sure to follow our FB page to get notifications for when we go live, which is every Wednesday at 12:30 Pacific and sometimes, we do these special shows for you as well. So ensure you don’t miss those by hitting that like button and opting in for those live notifications.

If you have questions about student loans, whether you’re a parent or a student, please ask them now and I will answer them in this two-week series. You can message us directly on FB, comment on this post, or email me directly at askabby@creditanddebt.org . Thank you so much for watching and I’ll see you next week on Ask Abby.

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