As of January 2021, Americans owe more than $1.71 trillion dollars in student debt.
This staggering total that has been accrued by more than forty-four million borrowers with the largest individual sums being held by physicians and other doctors. It’s no surprise, then, that each of these people has dealt with credit score changes as a result of their debt in one way or another.
Your credit score is an important tool that undoubtedly plays a key role in your financial life. It serves as the most basic go-between for lenders and borrowers of all kinds, and it will grow and change with you throughout your life. Unfortunately, not all of these changes will be good. There are many things that can strongly affect your credit score, and one of the most universal is student loan debt.
A credit score is compiled of three digits that alert lenders to an individual’s creditworthiness. It reflects the number of open accounts, amount of debt, and an individual’s repayment history in a manner that lets lenders easily determine whether their money will be returned in a timely manner by the borrower. Without a good credit score, generally around 680 points or above, it can be incredibly difficult to qualify for private student loans, mortgages, or loans of any other kind.
Bad credit can be especially tricky for physicians to overcome as it can prevent them from taking out traditional mortgages. This, among other reasons, is why lenders offer special mortgages with relaxed guidelines to doctors, called physician mortgage loans. These loans are built for medical professionals and cater to their needs in a way that traditional mortgages can’t, but they can still require very high credit scores of 700, 720, and even 750 points before an individual can be considered for a mortgage.
There are many different factors that can affect your credit score for better or worse, but none of these are possible without having a credit score to begin with. One of the most valuable things that you can gain from student debt — aside from education, of course — is the start of your credit history. Other than through student loans, it can be incredibly difficult for young people to begin building up their scores.
By taking a loan out, individuals can begin to set themselves up for financial success. That's why it's incredibly important to understand how your credit score is impacted by your student loans and other forms of debt. Here are just a few of the most common ways your student loan debt can affect your credit score.
Making payments on time
The best, most effective way to build your credit score is to make timely payments against any debt that you may have. You can’t grow your credit score without proving you’re trustworthy with money, and you can’t prove you’re trustworthy without borrowing and repaying money in the first place. Taking out a credit line or student loans is a good way to begin to build your credit, and the more faithful you are with repayments, the better your credit score will be.
Late payments and delinquency
If on-time payments are the best way to grow your credit score, then the worst thing you can do to have a good credit score is to miss one of those payments. Missing a payment, even by a single day, allows lenders to label you as a delinquent borrower and charge you a penalty for the missed payment. This can seriously damage your credit score can cause you to default on those loans if payments haven’t been made in 270 days.
Fortunately, there is a bit of a grace period if you do accidentally miss a payment. Federally held student loan servicers will wait at least ninety days to report late payments to credit bureaus, and privately held loan servicers will report them after thirty days. This doesn’t prevent a lender from charging you a fee, but it can save your credit history from reporting delinquency for the next seven years.
Multiple credit inquiries from lenders
One way student debt can affect your score that you may not immediately think about is through loan applications. Whenever you apply for a loan, the lender will run your credit to make sure you’re reliable enough to eventually pay the loan back. As these credit checks are run, the FICO system may mark that as red-flag activity causing your credit score to drop.
Refinancing student loans
While refinancing your student loans may not directly impact your credit score, it can help in other ways. Oftentimes refinancing will lower your minimum monthly payments, which can help you stay on track with the payments you need to make, thereby preventing a missed payment from hurting your score.
If you’re looking to refinance your student debt, do your best to apply for all the loans you’ve selected within a fourteen-day period. The FICO credit score model will register all of the resulting credit checks as a single check if they happen in quick enough succession. This can save you a lot of unnecessary trouble, as multiple checks, even of the same type, spread out over longer periods can negatively impact your credit score.
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Student debt is one of the easiest ways for individuals to begin building their credit scores. By taking out these loans, people are able to lay the foundation that their future financials will be built upon, so they need to understand the many ways their existing debt, and any future loans they acquire, will affect their long-term financial success.
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Jack is the Head of Content & SEO at LeverageRx, a personal finance company exclusively for doctors.