How student loans can help you develop a good credit score

Here's how borrowing for school can help you improve your credit score. (iStock)

Student loans can present financial challenges as you work to repay your educational debt and hopefully avoid late payments or defaulting on student loans. But while it may take time, money, and effort to manage your student loans effectively, there are some benefits to borrowing for school.

The most obvious advantage of student loans is that they help you cover the cost of earning a degree. But your student loan repayment can also be beneficial for another important reason as well. Student loan debt can impact your credit in numerous ways, and also help you build credit.

For many young people, student loans are the first debt they take on. Paying them responsibly can help you to develop your credit history, improve your financial health and hopefully earn a favorable FICO score that unlocks all sorts of personal finance doors for you.

HOW CAN I GET HELP PAYING BACK STUDENT LOANS?

Of course, this works only if you are smart about how much you borrow and you make all your payments on schedule. You can use an online tool like Credible to view a rates table that compares rates from multiple lenders at once to find the right loans for you and an online student loan refinancing calculator to understand more about loan payment costs.

What factors affect your credit score?

Your credit score is determined by five key factors:

  • Your history of on-time payments
  • The average age of your credit accounts
  • The mix of credit you have
  • The percentage of your available credit used
  • The number of new recent applications for credit

Although each of these different criteria are part of the credit scoring formula leading to good credit, fair credit or bad credit, payment history is the most important consideration of all. Of course, you can only start to develop a positive payment history once you actually owe money to creditors and subsequently avoid missing payments.

Student loans are often the first type of debt that become available to you, so they present your first chance to start developing a positive payment history. However, you want to be careful not to apply too often with different student loan lenders as too many recent applications could be hurting your credit.

3 WAYS TO REDUCE YOUR STUDENT LOAN DEBT

The good news is, you can use an online tool like Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.

How your credit score can improve from having student loans

Student loans affect credit scores positively by allowing for the opportunity to borrow and start developing a credit history.

Often, creditors won't give student loan borrowers a loan or credit card until they've already proven they can handle debt management responsibly. This makes it hard to borrow for the very first time. But student loans can be easier to obtain than many other kinds of debt, so they can be the start of an improving credit record that enables you to earn a good score.

HOW CAN BORROWERS RECOVER FROM STUDENT LOAN DEFAULT?

You can qualify for federal student loans even if you have no credit history at all. While the qualifying requirements are stricter for private student loans, many lenders allow you to get approved based on future income and/or with the help of a cosigner. Once you've been approved, your loan and your record of payments will show up on your credit report and be used in determining your score.

An online tool like Credible can be handy for comparing student loan refinancing rates from multiple lenders without affecting your credit score.

Can student loan refinancing help your credit score?

Once you've taken out student loans, the key to start building credit with them is to make sure that you always make your payments on time. Student loan refinancing can often make that easier.

Refinancing involves getting a new loan and using the proceeds from the new debt to pay your old student loans off in full. Refinancing can sometimes reduce your interest rate and it can also change the timeline for loan payment.

Often, refinancing allows you to pay off debt faster or to reduce your monthly payment, or both. If you can enable on-time payments by refinancing or can pay down your debt balance more quickly, this can improve your credit score.

6 BEST WAYS TO MANAGE YOUR STUDENT LOANS

You generally want to refinance only private loans, not federal ones, because you don't want to give up federal loan benefits. You'll also need to make sure you find an affordable new loan with a monthly payment that fits into your budget. Use an online tool like Credible to get prequalified student loan refinance rates without affecting your credit score.

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