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Using Student Loans to Build Good Credit

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When you’re concerned about how you’re going to pay for college, all that’s likely on your mind is getting student loans. That’s understandable. After all, nearly 70% of U.S. students wind up taking out student loans to get through college.

However, did you know the upside to such loans is that they can be used to get you going on credit, or to establish good credit? It’s true. In fact, using student loans to help build good credit may be a wise way to go, depending on your situation. Here’s what you need to know about it.

What are student loans?

These loans are crafted to help students pay for their post-secondary education plus related costs such as books, supplies and living expenses.

How can student loans help with my credit?

Although student loans are obviously designed for a specific purpose, they still are loans. Specifically, they’re installment loans, meaning they are to be repaid over a certain period.

Particularly if you have what lenders call a “thin” credit file, meaning you don’t have many accounts or much of a payment history, student loans can help you establish credit by having them on your credit reports, and, at length, building your credit history.

What’s more, if you have no installment loans on your credit report, taking out student loans can contribute to your credit mix, which also benefits your portfolio and scores.

All this is predicated on your making timely payments; if you miss payments, your loans will be deleterious to your credit.

What happens when I pay off a student loan?

At first, what can happen may seem counterintuitive: your score may slightly dip. Typically, this isn’t something to fret over. Your score will likely rebound, and, over time, might even improve.

The best news is that – again, assuming you’ve made on-time payments – your paid-off loan will live on your credit reports for a decade. And if high interest loan rates are nearly causing you to miss payments, we recommend that you don’t delay in seeking out a student loan refinance, which saves you money and allows you to pay off your loans faster. What is refinancing? It’s when you take out a lower-rate loan to cover multiple existing loans.

What impacts my credit scores?

The main factors that affect credit scores include:

Your payment history. You want to avoid missing payments, since that can hurt your scores. On the flip side, an extended history of on-time student loan payments can do wonders for your scores.

Your credit history. Likewise, an extended credit history, plus a longer average age of accounts, can benefit your scores. Your history typically begins when your loan is disbursed, even if it isn’t until after you graduate that you begin making payments.

How much you owe versus your loan balance. This can also impact your credit scores. As you continue to pay down your loans, those ever-diminishing balances can have a positive effect on your scores.

Hard inquiries. Yes, lenders must do a “hard inquiry” of your credit report, which may ding your score for a few months.

Credit mix. As we said, credit bureaus like to see that you have experience handling a variety of accounts, including installment loans.

Using student loans to build good credit not only makes sense, as the saying goes, it also makes dollars. So, whenever you’re lamenting that you had to take out loans to begin with, remember that you can use what you borrow to establish or improve your credit portfolio. Doing so will give you a good financial start in life, since, well, a loan’s a loan’s a loan.

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