With the ridiculous rise in tuition fees these days, which only seem to rise by the second, you'd be hard-pressed not to have to take out a student loan to pay for your college education. Most students simply can't afford to go to university without the assistance of a student loan. Even with partial scholarships, that extra help is often needed to top up your payments.
Student loans have their obvious advantages, but it's also extremely important that you deal with them very carefully, as they can inevitably have an effect on your credit score. Your credit score is a crucial part of your financial existence, so it's important for you to consider a few things about your student loan and how it can impact this number.
Student Loan = Debt
Once you take out a loan for any reason, you are automatically in debt, and are in a position to pay back this debt over a specified period of time. A student loan is no different than any other type of loan in this manner, as it essentially puts you in a position of debt that needs to be paid off at some point in your life. Any type of debt has a big effect on the way lenders view your financial situation. The more debt you have, the tougher it will be to get approved for other loans in the future, depending on your level of income.
Once you take out a student loan, you need to treat it as any other type of loan, be it a car payment, credit card payment, or mortgage payment. You must pay your bills on time and in full each and every month - failure to do so will only negatively effect your credit score, which is not the path you want to head down. Payment history is so important to your credit score. Make sure you can handle such a payment schedule in order to keep your credit score in check.
Consider Your Debt-to-Income Ratio
Student loans - like other types of loans - can dramatically increase your debt-to-income ratio. What is this exactly? It's essentially the percentage of your monthly gross income that is used to pay debts. If this number is high, it can have a negative impact on your credit score, and how lenders see your financial position. This means that if you need other loans for various reasons, it might be more difficult for you to get approved for them if the lender feels you're in over your head with your current debt.
The Good News - Credit Scores Can Actually Be Improved With Student Loans
Improving your credit score - or simply keeping it in stellar condition - is done by making your payments on time every month and in full. This is essentially how credit score is established - your behaviour and payment history directly impacts your credit score. If you are in the habit of paying late, missing a payment, or not paying in full, your credit score will suffer. If, on the other hand, you are able to keep up with your payments towards your student loan every month, this can actually help your credit score situation.
Be smart about how you handle your student loan. Don't let the idea of "debt" scare you - just let it keep you aware and responsible about paying it back as is stipulated in your contract.
A student loan is actually the perfect way to start developing a good credit score early on in life before you even begin a full-time career. Starting to make payments while you're still in school can even have a greater positive impact on your credit score, rather than waiting until after graduation to begin paying back this debt.