Student loans can hurt your credit score only if you default on them. Otherwise, student loans can actually help your credit score when you make your monthly payments on time. Limiting the money you borrow for higher education to an amount you can easily repay is the key to having student loans work in your favor.
On-Time Payments
Making the required payments on a modest student loan can benefit a new college graduate. Student loan servicing companies, which administer student loans once they enter repayment status, report payments to the credit bureaus: Equifax Inc. (EFX), TransUnion (TRU) and Experian PLC (EXPN.L). When you make consistent, on-time payments, lenders considering your loan applications can see from your FICO credit score that, even though you’re a new grad, you’re skilled at managing your money. When you make your student loan payments as required, the loan can help you qualify for your first apartment, an unsecured credit card with a favorable interest rate and even a job.
Defer but Don’t Default
If you run into financial trouble along the way, contact your student loan servicer immediately and ask for deferment. Keep making loan payments until your loan servicer approves your deferment request to avoid any delinquencies on your credit report. Lenders typically consider deferment a responsible move because it frees up income to repay other loans.
Defaulting means that the borrower cannot repay the student loan and has no interest in applying for deferment or seeking other repayment solutions. Defaulting on a student loan can make it difficult to get the loans needed to buy a home, a car or other big-ticket items.