Student Loan Repayment Strategy: It is true to say that a student loan serves as a wonderful bridge between academic seekers and quality education, allowing them to get a coveted university seat and fulfil their educational objectives.
Choosing the right education or student loan is a wise decision; but, repaying it on time is essential. Obtaining the loan may be easier, but repaying it may be difficult if not planned effectively. We all know that failing to make student loan payments can have a negative impact on one's credit score. However, circumstances generated another question: does repaying student loans with the help of a strong student loan repayment strategy impact your credit score?
As the admissions season for many international universities is on set, it would be a good time for parents and students to learn more about how obtaining a student loan and implementing a student loan repayment strategy affects your credit score.
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What is a Credit Score?
Before we unveil how and in what ways the student loan repayment strategy impact one’s credit score, let us first understand what exactly these credit scores are. A credit score is a number anywhere from 300 to 850 that represents a consumer's creditworthiness.
The higher the score, the more appealing a borrower appears to potential lenders. A credit score is determined by credit history, which includes the number of open accounts, total amounts of debt or loan, repayment history, and other criteria. Lenders use credit ratings to assess the likelihood that a borrower will repay loans on time.
The Fair Isaac Corporation, often known as FICO, developed the credit score model, which is utilised by financial institutions. While there are alternative credit-scoring systems, the FICO score is by far the most widely utilised.
How Do Credit Scores Work?
A credit score can have a huge impact on your financial life. It is an important factor in a lender's decision to extend credit to you. People with credit ratings lower than 640, for example, are considered subprime borrowers. Lending organisations frequently charge higher interest rates on subprime mortgages than on regular mortgages to compensate for carrying additional risk. For borrowers with poor credit, they may additionally request a shorter payback period or a co-signer.
A credit score of 700 or higher, on the other hand, is generally considered favourable and may result in a borrower having a reduced interest rate, resulting in them paying less money in interest over the life of the loan. Scores of 800 or higher are considered outstanding. While each creditor establishes its own credit score range, the average FICO score range is commonly employed.
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Excellent: 800 to 850
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Very Good: 740 to 799
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Good: 670 to 739
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Fair: 580 to 669
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Poor: 300 to 579
How Does a Student Loan Impact Your Credit Score?
Depending on how you manage your credit, any type of loan can have both positive and bad consequences on your credit score. As a result, the same holds true for a student loan. Before we unveil the student loan repayment strategy, let us see how your student loan can impact your credit score:
Positive Impact of a Student Loan on Credit Score
Paying on Time Can Improve Your Credit Score
Student loans/education loans are frequently the first exposure to debt for most people. Unlike other loans, which require you to begin repayment immediately after the loan is disbursed, student loans include a moratorium period during which you are excused from repayment. At this time, your loan is just charged a basic interest rate.
Once the moratorium period has expired, it is critical that you begin repaying the loan on schedule. One of the criteria that has a significant impact on your credit score is timely repayment. A strong student loan repayment strategy and schedule will help your credit score get off to a good start.
Assists You in Having a Better Credit Mix
The credit mix of your portfolio is the percentage of secured and unsecured loans. A sensible borrower is anticipated to have a solid mix of both, indicating that the loan was used not only for expenditure but also for asset generation. A student loan might be secured or unsecured, based on your credit score and other loan factors.
If you currently have a credit card or a personal loan, adding a secured borrowing such as a student loan may benefit your credit mix.
Helps You in the Formation of Long Credit History
Student loans can have terms ranging from 5 to 10 years. If this loan is repaid on time, it will help the borrower create a positive credit history, which is an important aspect in determining a credit score. However, if you have the option to pay off the loan sooner, you should consider the pros and downsides.
Negative Impact of a Student Loan on Credit Score
Defaulting on Student Loan Can Affect the Credit Score
As you are probably aware, one of the primary elements influencing your credit score is the timely repayment of credit. A student loan is one of the first debts that a student receives in his or her lifetime. An irregular or weak student loan repayment strategy or defaults will have a significant negative impact on the borrower's credit score. You'd know it's never a good idea to start your inning with a negative or a red remark.
Your Co-Credit Borrower's Score May Suffer Too
Because the student has no way of proving his or her income or creditworthiness, the student loan is typically granted based on the information provided by the co-borrower (either the parent, spouse or sibling). When you default on your loan, the co-credit borrower's score is also put at risk and may suffer a reduction.
An Increase in the Number of Hard Inquiries
If your co-borrower has a low credit score, you may not be approved for the loan on the first try. When you do repeated loan queries, you wind up with more and more hard inquiries, which is bad for your credit score.
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Student Loan Repayment Strategy to Impact Credit Score
As with any other loan, we have seen that a student loan or an education loan can also end up affecting your credit score in more than one way. Hence, given below is a solid student loan repayment strategy and some important tips that one should always keep in mind while planning their student loan repayment strategy convenient for students:
Plan the Loan Tenure
A student's first financial borrowing is usually an education loan. As a result, it is critical to plan repayment because it can influence a borrower's credit score. This technique relies heavily on loan tenure planning and further on the student loan repayment strategy. Students should review all loan components with the lender, such as loan amount, tenure, repayment alternatives, and EMI, in order to develop the optimal repayment strategy that fits the student's future journey.
Get Full Information About the Student Loan
Repaying a student loan is a major responsibility, and it is essential for borrowers to understand how much they must repay the lender during the loan term. Before onboarding, it is critical to properly read all of the documentation so that the customer understands the loan structure and all of the stipulations to which they are consenting.
Know in Detail About the Moratorium Period in Detail
Student loans have a moratorium period that allows consumers to pay EMIs until they begin earning. Certain lenders, however, charge simple/partial interest immediately once the first loan instalment is disbursed. When the EMI payments begin, the accrued interest is usually added to the principal amount.
However, some financial institutions allow for partial payback of the interest amount from the start. It is prudent to pay such interest because it prevents the extra amount from accumulating in the overall loan and teaches borrowers the importance of paying EMIs on time. Understanding the fine print of the loan structure is usually one of the first stages in properly developing a student loan repayment strategy.
Start Earning While Studying
Many students studying abroad opt to work part-time jobs while they study so that they may either maintain their lifestyle abroad or pay off a part of their loan interest. Even before you begin making EMI payments, this will help you to lessen the overall debt burden and a smooth student loan repayment strategy implementation.
Prepare an Emergency Corpus
When you decide to pursue higher education with education or a student loan, you should save some money so that you can continue to pay your EMIs even in an emergency circumstance. Aside from that, they should create a detailed budget and keep to it by spending wisely.
Why Early Student Loan Repayment Strategy is Good?
This does not imply that you should keep your student loans for the sake of your credit. Paying off your student loans can free up extra cash and reduce your debt-to-income ratio, both of which enhance your financial condition and make it simpler to qualify for another sort of loan, such as a mortgage. Overall, paying off your school debt is still a wise decision.
Paying off a student loan with the help of a solid student loan repayment strategy, like any other loan, is an important step toward establishing a solid credit history. This proves that you are responsible for debt management, which is required to qualify for new credit accounts.
Even if cancelling a student loan account lowers your credit score marginally, it will still likely help you financially in the long term. The only reason to wait is if you need the best credit possible in order to qualify for a mortgage or comparable product.
Another reason is if you have higher-interest-rate debts, such as credit card debt, that you want to prioritize first. If none of these reasons applies to you, it's usually in your best interest to pay off your student loans as soon as possible, even if it means temporarily lowering your credit score.
Timely Student Loan Repayment is the Key
Paying off your student loans as quickly as possible with the help of a great student loan repayment strategy makes sound financial sense, but keep in mind how this may affect your credit score. You may see a minor dip in your credit score, but it is unlikely to be significant — and without the burden of student debt, you will be able to make other smart financial decisions that will help your credit score in the long run.
Paying your student loans on time is one of the finest things you can do to keep your credit score positive. Paying off your student loans will result in some credit accounts being cancelled, but your excellent payment history will remain and demonstrate to lenders that you are a reliable borrower.
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