Unexpected benefits of having a student loan

You have probably heard quite a lot about many of the negative aspects of carrying student loan debt. However, taking out a student loan may have an unexpected bright side when you are building your credit early in life. If you are able to keep up with payments, your student loan debt may actually be a foundation upon which you can build a strong credit history.

Establish Credit Early

One of the biggest indicators of a strong credit score is oddly how much credit other creditors have been willing to extend to you in the past. So if you are trying to buy a $20,000 dollar car but there are only credit cards on your file with a $1,000 limit or lower, you may be denied credit even if you have never missed a payment. So having student loans on record with a positive record of repayment makes you more creditworthy when it comes to determining your eligibility for installment loans and mortgages. 

Build Long Term Credit

One of the most highly-weighted factors that influence your credit score is the length of your credit history. This means that a 30-year-old who began using credit at 18 has a huge advantage over someone of the same age who first was extended credit at 24. Student loans, even those that were subsidized and not in repayment, count toward that length of credit history so you may get a four-year jump on people of your same age group without having to make a single payment.

Total Debt Doesn’t Matter As Much As You Think

Looking at the total balance of a student loan can make it seem daunting, especially if you are trying to pay it off in the short term. However, when determining your creditworthiness, the total balance doesn’t matter as much as the monthly payment. Unlike credit cards, where high balances in relation to the credit limit are deadly to your credit score, installment debt like student loans are mostly calculated based on monthly payment. This is why longer-term loans often help credit more in the first few months and level off before dropping off significantly as the loan is in its final months. Lower monthly payments may extend the life of the loan and increase the total amount of interest paid, but this may end up being an investment in your credit score, as lower payments will improve your debt-to-income ratio and help you achieve the credit score needed to qualify for lower interest rates on large purchases, such as your home mortgage. 

Do you want to improve your credit with lower payments on your student loans? Sign up today for a free analysis and see how you can trim down your monthly payment obligation.