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How Student Loans Affect Credit Repair

by | Apr 18, 2024 | News

Student loans can play a big role in shaping your credit score and credit repair efforts, both in good and bad ways. Here’s how it works:

1. Payment History: Your track record of making payments is key to how your credit score is calculated. Keeping up with payments on your student loans can gradually boost your credit score. On the flip side, missing payments or defaulting on loans can drag down your credit score and make it tricky to fix.

2. Credit Utilization: Student loans fall under installment loans category, where you borrow a set amount and repay it in fixed installments over a specific period. Unlike credit cards with revolving balances, installment loans have a fixed balance that can impact your credit utilization ratio – the proportion of credit you’re using versus what you have available. Maintaining a low utilization rate can be beneficial for your credit.

3. Credit Mix: Lenders prefer seeing diversity in the types of credit reflected on your report, such as having both installment loans (like student loans) and revolving accounts (like credit cards). Having a good mix of different types of credit can actually boost your credit score.

4. Credit Age: Regarding the age of your credit accounts, it plays a role in determining your credit score. If you’ve been handling your student loans responsibly for a number of years, it can positively impact your credit score as it increases the average age of your credit accounts.

5. Inquiries: When you apply for student loans or refinance them, lenders usually conduct a thorough check on your credit report, which might temporarily lower your credit score. However, if you have multiple inquiries for the same type of loan within a short timeframe (such as student loan refinancing), they are often considered as a single inquiry, reducing the impact on your credit score.

In terms of fixing your credit, if you’ve missed payments or defaulted on student loans, it’s crucial to work on bringing them up to date and ensuring timely payments to kickstart the process of credit repair. Moreover, if managing student loan payments is challenging for you, exploring options like income-driven repayment plans or loan rehabilitation programs can assist you in regaining control and gradually improving your credit standing.