How to Keep Your Credit Rating When Using Student Loans

How to Keep Your Credit Rating When Using Student Loans

8 min read


The first thing to remember about borrowing money is that it’s not free money. You’ll have to pay interest to get it back, which means if you borrow $100 today, you’ll need to put at least $110 back in your bank account. That’s called principal + interest, and it shows up as a monthly payment on your credit report. If you’ve been paying attention to your credit score lately, you may have noticed that the higher your debt-to-credit ratio, the worse off you seem to be.

You may think that student loans are exempt from this rule since they’re considered federal government debt, but in reality, private lenders follow the same basic rules. There’s no way around it—if you want to keep your credit rating high, you need to start paying down those debts. Fortunately, there are a few ways to do just that without having to turn over your paycheck to Uncle Sam.

Debt Reduction

It might feel nice to skip out on the interest payments and just let that loan sit there, but doing so will only make things worse. Once the balance gets past 30% of what you owe, your interest rate increases significantly, and you basically become locked into a much higher price tag. Not to mention, you still have to pay the original amount of the loan. So how can you avoid this? Well, the easiest way is to pay off the entire balance as fast as possible. But even if you decide to take on some extra work and put off making any further payments, don’t worry! There are plenty of websites and apps that can help you monitor your spending habits and find a solution that works best for you.

Stop Making Payments

Let’s say you’ve managed to pay off enough money to bring your balance below that magic 30%, and you’ve decided to stop making payments altogether. Again, don’t worry. Your lender won’t send a collection team after you, but they still stand to lose hundreds (if not thousands) of dollars on their investment. Plus, this could actually improve your overall credit score since lenders use your payment history to determine whether or not you’re capable of repaying them.

Take Advantage Of A Consolidation Loan

One of the fastest ways to reduce your debt load is to consolidate your student loans into one low monthly payment. By consolidating these loans under one contract, you’ll effectively lower the total amount of money you owe, and in turn, your monthly payments will decrease. Since consolidation lowers the amount of money you owe by 20% or more, you should expect to see a significant improvement in your credit score.

If you know that you’re going to be graduating soon, it’s time to start getting serious about using these techniques to lower your debt burden. Don’t wait until you graduate and you’re already deep in student loan debt; instead, try to tackle your bills now while you’re young and your scores are at their peak. Remember, the sooner you pay down those outstanding balances, the less likely you are to run into problems later on. And who knows, maybe your debt situation will affect your future job opportunities, so you might want to consider taking advantage of your student loans before it’s too late.

How to Keep Your Credit Rating When Using Student Loans

Use credit wisely.

In recent years, Americans have become increasingly reliant on consumer debt. According to the Federal Reserve Bank, total household indebtedness reached $13.3 trillion at the end of 2018, a level last seen in 2007.

With student loans being one of the largest categories of consumer debt, keeping track of how much money you owe is critical to maintaining a good credit rating. However, if you’re juggling multiple accounts, keeping tabs on all your debts — and making sure not to incur any late fees — can be overwhelming.

To help you keep your good standing, here’s what you need to know about using student loan debt responsibly.

Your financial situation isn’t unique.

Everyone who takes out a student loan is not in the same position financially. Some people may have parents who are willing to co-sign for them; others may already have a line of credit they use to cover unexpected expenses; and still others may have saved enough money to pay off their entire debt before starting college.

However, no matter where you stand today, paying back your student loans won’t change overnight. If you take on additional debt while preparing for the future, you could jeopardize your credit score.

You’ll want to make your payments on time.

According to a study published in the Journal of Consumer Research, consumers who consistently miss a payment on their mortgage or car loan are viewed less favorably than those who don’t. Similarly, credit card companies consider late payments to be among the top reasons why people lose their good credit scores.

For student loan borrowers, missing even just one payment could cost you a lot. Depending on the type of loan you took out, you might face a higher interest rate for each month of delinquency. And if you’ve accrued too many late fees, you may find yourself ineligible for certain types of federal aid, including grants and low-income housing programs.

If you’re having trouble staying on top of your payments, try setting up automatic bill payments. You can choose to have your school automatically deduct the minimum amount due every month, or set up a schedule for larger monthly payments over several months.

Keep records

Depending on your loan type, lenders may require you to provide documentation of your repayment history when you apply for a new job or rent an apartment. Any documents that show your payments were on time should be kept handy, along with copies of statements showing your balance and any missed payments. These should be stored in a safe place where you or your lender can easily access them should an audit occur.

Don’t worry about getting rid of old debt.

How to Keep Your Credit Rating When Using Student Loans

Educate yourself on the loan options offered.

There are many different types of loans available today. If you would prefer an alternative payment option and have the choice between an education loan and a consolidation loan, choose the latter. Students who consolidate their federal student loans may lower their interest rate, but they will need to pay off the balance faster than if they had taken out smaller amounts of money over time with smaller monthly payments. Consolidation loans do not provide any additional perks. If you would prefer an alternative payment option and have the choice between an education loan and a consolidation loan, choose the latter. Students who consolidate their federal student loans may lower their interest rate, but they will need to pay off the balance faster than if they had taken out smaller amounts of money over time with smaller monthly payments. Consolidation loans do not provide any additional perks, but they allow you to save money on interest and shorten the repayment term. In addition, you should consider consolidating your loans before you graduate so that you can avoid paying back student loans after graduation and possibly jeopardizing your credit rating.

Be sure to apply early.

You should wait until after January 1st to submit your application. That way, you’ll have access to the best terms possible. You don’t want to miss out on the chance to cut a deal at the beginning of the year.

Ask for help.

Your parents might be able to help you find a good lender who offers lower rates. Or, you could ask a friend for advice. Just make sure to explain what you’re doing properly and politely.

Don’t take out private loans.

Private loans are expensive, and they often carry higher interest rates than federally-guaranteed ones. Plus, those lenders don’t look kindly upon students who borrow outside of government programs. So seek out a reputable company through an official channel and stick to it.

Shop around.

It’s smart to shop around for a rate. There are various websites available online that compare rates and provide information about how much money you’ll end up saving.

Pay attention to the fine print.

Don’t just accept whatever term your lender offers you. Read everything carefully, and know exactly what you’re signing. Make sure you understand the details, including things like annual fees and late penalties.

Don’t default.

If you can afford it, then go ahead and pay for school. However, don’t let yourself fall behind, and don’t miss payments. Take care of your finances while you’re still young, and you won’t have to worry about them later.

How to Keep Your Credit Rating When Using Student Loans

Know your options.

Student loans may seem intimidating at first, but remember that they’re just money! You don’t have to pay them back right away. Most student loan companies offer a grace period where you can delay paying before starting repayment. If you decide not to take out any loans, you won’t lose any credit score points.

Make sure you use them wisely.

When taking out these types of loans, make sure you’re smart about how much you borrow. Don’t just rush into it, and don’t borrow more than you need. Also, if you know you aren’t going to graduate school, you shouldn’t take out loans. These should only be taken out for educational purposes.

Take advantage of the benefits.

There are many different benefits to taking out student loans. Some of these include having access to low-interest rates, flexible payment plans, and free counseling services.

Pay them off early.

If you do choose to take out student loans, make sure you are able to pay them off within 10 years. This will give you more time to get started on repaying your debt.

Choose a company carefully.

Look for a reputable loan company that’s been around for a long time. Always ask for references and check online reviews. Be careful who you choose, though; some bad loans can damage your credit rating.

How to Keep Your Credit Rating When Using Student Loans

Do not make any more payments than necessary.

Make sure you pay off at least what’s owed each month. If you’re paying interest only, use the minimum monthly payment amount possible, even if it means making two (or more) payments per month instead of just one. You want to avoid paying anything extra!

Pay down your loan whenever you get a raise or promotion.

If you have a job that pays well or gets promotions, you should try to put some extra money towards your student loans once a year. This way, you won’t have to worry about having to take out any additional credit cards to pay them off.

Make sure you do not charge items to your card after they are paid off.

This is called using the credit card as a cash back card. Don’t do this unless you absolutely need to. Having a balance on your card can cause a lot of problems down the road. It can hurt your credit score, and it could even cost you money if you end up having to pay late fees.

Only use one credit card for everything.

It might seem convenient to have several different credit cards around. But, don’t do it! One of the biggest mistakes that people make is carrying balances on their various cards. So, if you’ve got something that’s already paid off, don’t use your regular credit card to buy something else. Instead, use a separate credit card that is specifically designated for purchases and charges.

Use a secured card

A secured card comes with its own line of protection. A lot of banks offer these types of cards, and they provide a little bit of security to ensure that you’ll actually be able to pay them back. You can find this type of card by searching online. Just keep in mind that the higher the APR, the lower the security level. So, look elsewhere if you’re looking for a low APR.

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