Student loans are subject to specific federal rules and regulations that can impact your overall creditworthiness–here’s a look at how student loans can affect your credit, and when it may be time to get help from companies offering credit repair in Austin, Texas to help you through the process.
Loan Deferment and Forbearance
Contrary to popular belief, student loan deferment and forbearance will not hurt or negatively impact your credit. While it will be noted in your credit report, it will have no bearing on your score unless you miss or make late payments before receiving approval for your deferment request.
There are certain circumstances where deferment and forbearance can actually improve the likelihood of getting a loan, such as a mortgage, approved. For instance, if you can adequately demonstrate to your bank that your student loan is (or will be) in forbearance, it will likely factor that into its decision-making process when examining if your discretionary income is enough to pay back borrowed funds.
Installment Loans
When your student loan is reported to credit bureaus, they treat it as an installment loan rather than revolving credit, which means you’re making a fixed number of payments on the outstanding balance. Regarding your credit score, installment loans carry less weight than an item classified as revolving credit, like a credit card.
By properly managing your student loan payments and credit card balances, reporting agencies like Experian, TransUnion, and Equifax will use that behavior as a strong indication that you are fiscally responsible. Debt management is essential to ensuring your credit score remains in good standing.
Building Credit History
Most individuals who apply for a student loan are just entering college or graduate school and have yet to build a strong credit history. Qualifying for a loan or new credit line can sometimes be difficult when you cannot demonstrate a strong credit history—especially if you’ve just graduated and are not yet employed.
This is where a student loan can prove beneficial. Federal student loans do not require a long-standing credit history to qualify, so they’re a great starting point for building credit.
Adding Credit Diversity
One of the criteria used to calculate your credit score is the types of credit you have and how diverse those credit sources are. Adding an installment loan, such as a student loan, to your portfolio can help improve your credit standing. As long as you’re making payments on time, the more types of credit you possess, the greater impact it’ll have on boosting your credit score.
Making a Good Investment
When you’re borrowing funds for a student loan, it’s seen as an investment in your future. In other words, you’re not applying for a loan for a luxury vehicle or something extravagant that isn’t an essential need and could likely be purchased using a credit card. Because student loans are considered smart investments, they can be used in your favor if a bank is determining whether or not to approve a loan you’re requesting.
Account Delinquency
Your credit score is negatively impacted if you have an account that’s considered delinquent. If this happens when you are awaiting deferment approval, federal student loan lenders usually correct the delinquency reporting automatically by properly backdating your deferment once it’s approved.
You can encounter this issue for several reasons–for example, maybe you are back in school pursuing your degree and accidentally dropped the ball on mailing your deferment form. Because of this, your account transitioned into past-due territory. This can quickly be resolved by sending in your deferment form and backdating the paperwork date to when you originally qualified for the deferment. Once this is processed, the lender should remove the negative report from your credit history and fix any other issues resulting from the delinquency.
Past Due Reporting
It’s easy to panic when you realize you missed a student loan payment. The good news is that most federal loan lenders have a policy whereby they do not report past due balances to credit bureaus until after sixty days. If it’s only been a few days or weeks, there’s no need to feel alarmed–there is a strong likelihood that it will not impact your credit score.
While it’s never good to miss a payment, if you have a clean track record of making payments on time, one slip-up won’t blemish your credit standing. Make sure to remit payment to your lender as soon as you realize the payment was missed.
Resolving Delinquency
If your account has rightfully moved into delinquency, it will negatively affect your credit standing. However, if you focus your efforts on making your student loan account current by bringing it out of past-due territory, it’ll help raise your credit score and help paint your credit history in a more positive light.
There are options available for federal student loan borrowers with delinquent accounts and repayment assistance to help bring your account current. Once your account is current, you can see an increase in your credit score in as little as a few weeks.
Write a Dispute Letter
In most cases, a properly-worded dispute letter does the job of removing student loans from your credit report. You can fix any incorrect information in your credit report with a mere phone call, but it’s best to write a formal letter. By doing that, the request and any correspondence is done professionally and there is an official document that can be used to track your claim, making it much simpler to follow up on in the future.
In your dispute letter, you must include your student loan reference number, a clear explanation of the error with a copy of the credit report. Also, provide any information or evidence, such as proof of payments, that demonstrates that the current report contains misinformation.
Another important thing you need to do is to request that your student loan servicer contact the major three credit bureaus so they can correct the information on their end. Make sure you send the letter through certified mail with a return receipt requested. Then, follow up if you haven’t gotten a reply within two weeks–the request should be confirmed within thirty days, but make sure to double-check your report.
Gather Information to Support Your Claim
Before you send off your letter, you need to gather some documentation or evidence that supports your claim. This evidence or documentation can be in the form of emails from your servicer or bank statements that prove you made on-time payments and that there is an error on the report. This way, you can remove the student loan from your credit report.
File For an Account Dispute
If your loan servicer doesn’t notify the credit bureau to correct the loan information on your credit report, your best bet is to fix things yourself. To do this, you need to file an account dispute to force the credit bureau to review your file. Only do this as a last resort after contacting your student loan servicer.
Here’s a simplified outline of what you need to do while filing an account dispute:
- Collect all required evidence that supports your claim.
- Write a dispute letter to your student loan servicer to correct your record.
- Follow up on your letter if you haven’t received a confirmation within two weeks.
- After receiving the confirmation, recheck your report to see if it’s fixed. You’ll have to file a separate dispute with each of the three major credit bureaus.
Final Thoughts
Having a good understanding of your credit and how your student loan can impact your standing is extremely important. Maintaining a healthy credit score will play a critical role in things like your ability to procure loans and gain employment. Because of this, you need to take every step possible to take good care of your student loans and delete late payments from your credit report–a professional credit repair expert, such as those at The Phenix Group, can help.
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