Do Late Student Loan Payments Affect your Credit Score?
The answer is yes. It is common knowledge that a lot of undergraduates rely on student loans to finish their degrees. However, many often take for granted the scheduled payments on these loans. Most have the slightest idea that late student loan payments can affect one’s credit scores. Making late payments or totally defaulting on your student loans have implications which you may not realize today but will affect you greatly in the future.
Loan delinquency vs. loan default
Lenders know that, sometimes, missing deadlines are not intentional. They understand that there are certain emergencies that cause students’ failure to satisfy obligations on time. However, lenders know that missing a single payment and missing several successive payments are different scenarios with varied consequences.
Loan delinquency refers to one’s failure to pay the loan on the specified date. Hence, a loan becomes delinquent after the day borrower was supposed to pay the loan. The loan remains under the delinquent status until and unless the borrower pays, defers, or forebears the loan.
Loan default, on the other hand, refers to the failure to pay the loan for a particular length of time. Take federal student loans, for example. If you missed to pay your federal student loan for a day, it is not yet considered loan default. However, if 270 days have passed and the loan is still not yet paid, that will be considered as default in payment.
There is an estimated 22 percent of borrowers all over the US who are not yet considered default but are between 90 to 270 days late for payment already. Loan delinquency and loan default affect one’s credit score differently.
How credit scores are measured
There is no hard and fast rule on measuring credit scores because they take into account a lot of variables such as the length of credit history, credit variation, total balance-to-limit ratio on credit cards, even defaults on student loans, and many other factors.
More often than not, lenders use FICO scores to determine credit score. FICO scores are used by almost every lending company, including auto lending, mortgage, and credit cards. However, how FICO calculates the score is not publicly known. Therefore, nobody can really predict know a particular event affects one’s credit score. This is the reason why a loan delinquency will affect your credit score in a manner different from how a loan default would. What is important to keep in mind, though, is that it will affect your credit score in one way or another.
What happens when credit score is affected?
When you are always late in paying your student loan, chances are, you will get a low credit score. Low credit scores make it harder for people to access other forms of credit such as housing loans and auto loans. Other lending firms may still easily offer you some credit but at sky-high interest rates. Certain landlords may even deny your application to rent their apartment because they will fear that you will also delay in paying rent. There will also be employers who will refuse to hire you because of your credit standing.
Ways to protect your credit score
Credit is very powerful. It can help you make positive changes in your life. However, if you are not careful enough, it can hold you back. Maintain a high credit score even at a young age and it will be easier for you to get credits in the future. In case you miss a day of payment on your student loans, there are ways to prevent this single failure from damaging your entire credit reputation.
• Look at repayment plans.
When shopping for student loans, do not box yourself in deciding based only on interest rates. There are factors such as repayment plans that you should also consider. Some repayment plans allow you to begin paying your loan on minimal rates. The rates will increase only every two years. This kind of repayment scheme will give you enough time to look for a job after college that supports it. This will further allow you to save some money while paying off your loan.
• Recover from loan default.
There is another scheme which helps students to redeem their credit scores from loan default. It is an income-based default rehab. This scheme allows students to get their loans out of default category and remove the default from their credit scores by paying even as little as $5 monthly for 10 months.
Always remember that student loan defaults affect your credit score but there are ways to recover from it. Know your options. Contact Assisting America today for more details.
Tags: credit score, student loan default, student loan delinquency
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