Federal student loans can help your credit rating if you make on-time payments, the same as any other installment or revolving loan. However, defaulting or making delinquent payments on federal student loans can negatively impact your credit score for longer than other loans. Under certain circumstances, federal student loans can hurt your credit for life.
On-Time Payments
Making timely payments on your federal student loans will positively impact your credit rating. The largest single factor that affects a consumer's overall credit rating is payment history. Payment history is 35 percent of the credit rating calculation. Paying student loans on time each month demonstrates that you are a financially responsible consumer. Federal student loans also report to all three credit bureaus, which builds credit history. Credit history accounts for 15 percent of the overall credit score. Having federal student loans on your credit can impact the overall score by 50 percent.
Debt Ratio
Outstanding balances on federal student loans can hurt your debt-to-income ratio. Lenders evaluate your creditworthiness primarily based on your credit rating and your debt-to-income ratio. To calculate your debt-to-income ratio, divide the total recurring debt obligation per month by your total gross monthly income. If the ratio is higher than .36, it may prove more difficult to qualify for a loan. Lower debt-to-income ratios can also translate into better interest rates for the credit you need.
Delinquency
Federal student loans can hurt your credit rating if you are delinquent in paying the monthly amount due. The same way that on-time payments boost your payment history, delinquent payments negatively impact the overall calculation. With 35 percent of your credit score on the line, delinquent payments can significantly reduce your score. Delinquent payments for many loans fall off of your credit score after seven years, in accordance with the Fair Credit Reporting Act. Student loan delinquencies can remain on your report for seven years after the loan is repaid. Potential lenders will likely request that you explain any delinquent payments for student and other loans as part of future loan evaluations.
Default
Defaulting on federal student loans have more stringent consequences than defaulting on other revolving or installment loans, such as credit cards. The FCRA allows certain delinquencies, defaults and collection accounts to be removed from your credit rating after seven years, no matter if the loan is repaid in full or not. Federal student loans can only be removed from your credit report seven years after they are paid in full. This means that defaulted federal student loans will follow you for life if you never repay them.
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