11/16/2012 3:45 PM ET|
How student loans affect credit
Higher education is coming with a bigger price tag these days. Don't let college debts put a dent in your credit scores.
It's no secret that the cost of getting a college education can be downright frightening. In some cases, the total four-year tuition and living expenses can exceed the price of a new home.
While many families have worked hard to save money in anticipation of their children's college expenses, tuition, fees and other higher-education costs have been skyrocketing. Thus, parents and students are taking on more and more debt to cover the education bills.
Recent findings by the Pew Research Center found that 22.4 million households, or 19%, faced college debt in 2010. That is double the share in 1989, and up from 15% in 2007, just before the start of the recession.
Consumers carry a greater amount of student loan debt today than they did seven years ago, according to a FICO study. In 2012, the average student loan debt was $26,500 -- a 54% increase from the average of $17,200 in 2005, according to the study, which also estimates that a million consumers today owe $100,000 or more in student loan debts.
What impact does higher-education debt have on credit scores?
• Paying student loans on time is important, as reported student loan delinquencies will ding credit scores. Some consumers mistakenly assume that government-backed loans are treated differently and that missing payments won't hurt their scores. That is simply not true; if any missing payment is reported, the credit rating agencies will consider this information.
• Student loans that are reported to the rating agencies as deferred are still considered, although the status itself is not viewed as either a negative or positive.
• Student loans are typically reported as installment loans (in which repayment is made in fixed monthly amounts). As such, while student loan balances factor into credit scores, they typically have less effect than balances on revolving accounts, such as credit cards.
In general, you should treat a student loan like any other credit obligation, paying it on time, to keep your credit scores in good standing. You worked hard to get that degree, and you need to be just as diligent about paying off your student loans.
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Credit score should be called a DEBT score. The only thing you can get with a credit score is more into DEBT. Pay off your debts and get your "credit" score to 0. Then live your life within the limits of the income you have. No debt = 99% less worries in life.
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