do student loans affect your credit score?
a good higher education is the foundation of a successful career. but in today's times, the cost of quality education has become more and more expensive. in such circumstances, the facility of student loans or education loans is the only hope for common people to finance their higher education.
whether you want to pursue higher studies either in India or abroad or want to get back to studies after working for a while, an education loan can be easily applied. the banks and financing institutions have set education loan eligibility and other terms and conditions to avail a study loan. the factors affecting your education loan eligibility include - the reputation of the college/institute, type of course, academic record of the student, collateral security against the borrowed amount, income, and credit score/credit report of parents.
today, we will discuss how student loans affect your credit score. but first, let's understand all about credit score and credit reports.
what is a credit score and what is its usage?
a credit score is a 3-digit number that ranges between 300 to 900 and it is an indicator of your creditworthiness. the credit score and credit report is built by four major credit bureaus (TransUnion CIBIL, Equifax, Experian and CRIF Highmark) by collecting information from banks and financial institutions. the credit score is used by banks and other financial institutions to analyse the creditworthiness of an individual. the higher your credit score is, the more willing are the banks to lend you money.
does an education loan affect your credit score?
yes, an education loan is also a debt product, hence it does impact your credit score. similar to other loan products such as personal loan, car loan, home loan, delayed payment or default on your student loan or education loan will decrease your credit score. generally, education loans have a moratorium period and the repayment of the loan starts one year after course completion or 6 months after the borrower gets a job, whichever is earlier. you should start repaying your education loan as soon as you complete the course or as soon as you get the first paycheck. you can get a prior estimate of monthly installment on your education loan using a loan EMI calculator.
what are the positive effects of a student loan on your credit score?
1. paying education loan on time can build up your score
a student loan or education loan can be one of the first exposure to credit for most individuals. unlike other loans, student loans come with a moratorium period, which means you are exempt from repayment for a few years and only have to pay a simple interest. but once the moratorium period is complete, start paying your education loan EMIs on time. paying your education loan on time can help you increase your credit score.
2. you can create a better credit mix
a credit mix means having different types of credits, for example, home loan, education loan, auto loan, personal loan etc. a good credit mix includes proportion of secured and unsecured loans. an education loan can be a secured or an unsecured credit depending upon the terms and conditions of your loan.
3. helps you build a long credit history
the loan tenure of education loans can be up to 5 to 10 years. if you repay your education loan in the right earnest, it will help you build a strong credit history. having a long credit tenure helps in building a good credit score. however, if you can afford to pay off your education loan earlier, you should always weigh the pros and cons of the same and take the right decision.
what are the negative effects of a student loan on your credit score?
although education loans can help you build your credit score, there are many negative effects of the same if you fail to handle the loan responsibly. here a few examples of negative effects of a student loan on your credit score:
1. defaulting on education loans can decrease your credit score
defaulting on loan repayments is one of the major factors that degrades your creditworthiness. if you fail to repay your education loan on time, your credit report will be low. since an education loan can mark the beginning of your credit history, it's never a good idea to begin your innings with a negative or a red remark.
2. it may degrade the credit score of your co-borrower
student loans or education loans are borrowed jointly with parents as a co-borrower. since, students have no means of income of their own, the education loan is given on the basis of the credit score and credit report of the co-borrower (either of the parent, spouse or a sibling). when you default on your education loan, the credit score of the co-borrower also sees a drop.
3. increase in hard enquiries
if your co-borrower has a low credit score, then the bank may not give you an education loan and you might apply for education loans with various lenders. when you submit too many credit requests at the same time, there will be repeated inquiries towards your co-borrower's credit score. having too many hard inquiries at the same time may lower the credit score of your co-borrower.
in conclusion
as you take an education loan or a student loan for the beginning of a great career, do not make small mistakes that may spoil your career in the future. you should always be responsible for the credit you take and make timely repayments of your debts to build a credit score and credit report.
you can check your credit score for free on CRED.