Marcia's Blog

How to stop student loans from ruining your credit

Education is one of the greatest investments you can make in yourself, but it often comes at a cost. In fact, students who graduated in 2012 had an average of $29,400 in student loan debt.

While I believe the good outweighs the bad when it comes to education, there’s no doubt in my mind that starting your career with such a financial weight on your shoulders can be debilitating. However, it is crucial that you stay on top of your student loan payments or you will derail your chances of building wealth and finding your fortune before they even begin.

Your credit score is based on a number of factors including how much you owe and your payment history. A student loan is an example of installment debt, which is a loan on which you make regularly scheduled payments over a set period of time. When you take out the loan, you know that you will pay a certain amount each month and the loan will be paid off by a certain date.

Credit card debt, on the other hand, is an example of revolving debt. With revolving debt, the interest rate and the payments can fluctuate, and there is no set period in which the debt must be repaid. You can end up carrying revolving debt all your life and never pay it off!

Credit scoring bureaus tend to view installment debt more favorably than revolving debt, so as long as you’re making on-time payments on your student loans, your student loan will likely not have as negative an impact on your credit score as a credit card that you’ve run up to the limit.

In some cases, your student loans may even help to improve your credit score. The longer your credit history, the better it is for your credit score. If your student loans were taken out several years ago, they could contribute to the length of your credit history, which could boost your score.

Of course any boost you get would be offset if you don’t make your student loan payments on time. If you are having trouble paying your student loan debt, do these three things now.

    Communicate with the creditor. Putting your head in the sand will only make things worse. Do not avoid dialogue with them.
    Set up a payment plan. Even if you can’t afford to pay much, something is better than nothing at all.
    Explore other options. There are potential solutions that you might not be aware of. Speak with your creditor about such possibilities as deferment, hardship agreements, modification and consolidation.

Education can open many doors for you in your personal and professional life. By paying your student loans on time you ensure that financial doors are open for you as well.