With the U.S. government once again forwarding missed student loan payments to collections, millions of Americans are experiencing declines in their credit scores.
Last month, the Education Department said it would begin involuntary collection for Americans with student loans in default.
If a borrower fails to make payments for 90 days, the loan servicer marks the account as delinquent and reports it to the major credit bureaus. These reports can significantly impact a borrower’s credit rating, sometimes as severely as a personal bankruptcy filing.
Here’s what to know about how student loans impact credit scores.
How do student loans affect your credit score?
Student loans are typically one of the first major lines of credit for younger adults. Once reported to credit bureaus, they establish a credit history, which is a key factor in your credit score. Credit scoring models, such as FICO, reward borrowers who have a mix of different credit types. Student loans are installment loans, so having them alongside other revolving credit can positively affect your score.
Can defaulting on student loans impact your credit?
Failing to repay a student loan can result in wage garnishment and loss of eligibility for additional federal aid until the debt is resolved or a repayment agreement is established. Regardless of the loan type, a default will remain on your credit report for up to seven years.
Can paying student loans improve your credit?
According to a report from Citizens, being responsible with your student loans can help your credit in the long run.
Taking out student loans early in adulthood can extend your credit history, potentially boosting your credit score. If you’re new to credit and have only a few accounts, your student loans may have a greater influence on the average age component of your score.
How is a credit score calculated?
According to the Consumer Financial Protection Bureau, a FICO credit score ranges from 300 to 850, with a score of 850 considered excellent. Your credit score consists of five categories. Here’s a look at how these categories contribute a certain percentage to your score.
This article originally appeared on Austin American-Statesman: Are you behind on your student loan payments? How not paying can impact your credit score
Reporting by Marley Malenfant, Austin American-Statesman / Austin American-Statesman
USA TODAY Network via Reuters Connect
