Student Loans Affecting Credit Scores - What to do?
Reader Question: I am in school, and I also work as a bartender and waitress. My BIG problem is this: each semester that I get a loan from the bank, my credit score drops almost 15-20 points. I want to buy a home in the next few years (or sooner), but by the time I graduate in two years, I will have a horrible credit score because of this. Should I drop out in order to salvage the ALL IMPORTANT credit score? I am so upset about this.
Like many of the questions we receive, this is one that only you can answer. But we can certainly offer some insight that may help you. The real question here is which do YOU value more: getting an education or protecting your credit score?
One thing you might want to consider before making any rash decisions is exactly what is causing your score to drop? Is it truly the fact that you take on additional student loan debt each semester, or is there another underlying reason that can be corrected without requiring you to make a choice between your credit score or your degree?
Credit scores used to be a big mystery. Lenders used to tell us there was a complicated calculation involved that was very difficult for the average person to understand. We now know exactly how credit scores work and what factors influence them the most. The biggest chunk of that score is how you pay your bills. Do you have a consistent history of paying every account on time, or have you had some late payments recently or in the past? Have you had any accounts sent to collection? Either of these situations can significantly impact your credit score.
The next thing to examine is how much money you owe and how much credit you have available. For example, if you have several credit accounts with balances consistently close to their limits (i.e. nearly maxed out), that will impact your credit score. To creditors, this could give the appearance that you rely on these credit accounts to live from day to day, and that you're unable to pay them off. It is best to keep your balances low and use those credit cards as only when necessary.
Your score is also affected somewhat by having several open accounts that are used very little or not at all (i.e., accounts that lack a consistent payment history). This tells creditors there may be a possibility you will max those accounts out, potentially increasing the outstanding debt by a significant amount.
Also, the longer you've had credit accounts, the more points you are assigned toward a positive credit score. So sometimes it is best to keep that credit card you got when you were just starting out, instead of playing the balance-transfer game to chase after those low introductory rates. If you close your oldest accounts, you are in essence shortening your credit history, which could negatively affect your score. Often, a credit card company will reduce your interest rate if you've been a customer in good standing for a few years. This is a much better option than constantly opening and closing credit accounts.
Just as important is your mix of credit. If you only have credit cards -- or in your case, student loans -- you won't represent a consumer who has experience with other types of credit such as installment loans, auto loans and mortgages.
Numerous inquiries and new applications can also have an affect on your score, especially if you are young and your entire credit file is fairly new. To a creditor, an excessive number of inquiries and new applications can represent a consumer who is suffering from a cash flow problem and is searching for credit to help compensate. So this too can affect your score in a negative way.
Now that you know exactly how your credit score works, you can better answer the question -- is it really those loans each semester that are causing your score to drop, or is there another perfectly good explanation? When you can answer this question, you'll be able to make the best decision for you and your future. Good luck!
Like many of the questions we receive, this is one that only you can answer. But we can certainly offer some insight that may help you. The real question here is which do YOU value more: getting an education or protecting your credit score?
One thing you might want to consider before making any rash decisions is exactly what is causing your score to drop? Is it truly the fact that you take on additional student loan debt each semester, or is there another underlying reason that can be corrected without requiring you to make a choice between your credit score or your degree?
Credit scores used to be a big mystery. Lenders used to tell us there was a complicated calculation involved that was very difficult for the average person to understand. We now know exactly how credit scores work and what factors influence them the most. The biggest chunk of that score is how you pay your bills. Do you have a consistent history of paying every account on time, or have you had some late payments recently or in the past? Have you had any accounts sent to collection? Either of these situations can significantly impact your credit score.
The next thing to examine is how much money you owe and how much credit you have available. For example, if you have several credit accounts with balances consistently close to their limits (i.e. nearly maxed out), that will impact your credit score. To creditors, this could give the appearance that you rely on these credit accounts to live from day to day, and that you're unable to pay them off. It is best to keep your balances low and use those credit cards as only when necessary.
Your score is also affected somewhat by having several open accounts that are used very little or not at all (i.e., accounts that lack a consistent payment history). This tells creditors there may be a possibility you will max those accounts out, potentially increasing the outstanding debt by a significant amount.
Also, the longer you've had credit accounts, the more points you are assigned toward a positive credit score. So sometimes it is best to keep that credit card you got when you were just starting out, instead of playing the balance-transfer game to chase after those low introductory rates. If you close your oldest accounts, you are in essence shortening your credit history, which could negatively affect your score. Often, a credit card company will reduce your interest rate if you've been a customer in good standing for a few years. This is a much better option than constantly opening and closing credit accounts.
Just as important is your mix of credit. If you only have credit cards -- or in your case, student loans -- you won't represent a consumer who has experience with other types of credit such as installment loans, auto loans and mortgages.
Numerous inquiries and new applications can also have an affect on your score, especially if you are young and your entire credit file is fairly new. To a creditor, an excessive number of inquiries and new applications can represent a consumer who is suffering from a cash flow problem and is searching for credit to help compensate. So this too can affect your score in a negative way.
Now that you know exactly how your credit score works, you can better answer the question -- is it really those loans each semester that are causing your score to drop, or is there another perfectly good explanation? When you can answer this question, you'll be able to make the best decision for you and your future. Good luck!
Labels: Credit scores
posted by Brandon at
11:20 AM
