Can Student Loans Help You Build Credit? | McCarthy Law
August 20, 2021

Can Student Loans Help You Build Credit?

As the price of higher education quickly rises, many students rely on federal or private loans to offset the cost. At the end of an undergraduate or graduate program, your student loans may be daunting. However, they could also offer an opportunity to build your credit and credit history. This might be confusing, especially if you have no experience with loans or credit. If you have more questions, do not hesitate to contact the debt attorneys at McCarthy Law.

How Paying Student Loans Can Boost Your Credit

There are several ways student loans can help young people build their credit. They offer an opportunity to show that you can make regular payments on your debt. Additionally, student loans diversify your account credit and age.

Lowering Perceived Risk

Many creditors deny young people because they have no credit history. They need to know that you can handle finances, but more importantly, pay them back at the end of the month. Making on-time payments with your student loans shows the major credit bureaus good financial management skills. It also increases your credit score, making it easier to obtain credit cards, loans, or mortgages.

Adding Credit Mix

Another standard of how credit bureaus evaluate is the diversity of credit types you have. They classify student loans as an “installment” since you pay them off over time. Credit cards are a “revolving” account where there is a minimum due each month. Having a mix of both contributes to building good credit.

Increasing Account Age

When you apply for a credit card or loan, most agencies will look at your average account age. Banks and lenders see someone with a more extended credit history as less risky than an individual with no credit. Since you pay student loans off over a few years, they help increase your average account age and, with it, your credit score.

How Can College Students Build Credit?

Establishing credit is hard, especially as a young person with no financial history. Many students are in the same situation. It is even more frustrating when you need credit to offset the initial cost of an education. Here are a few additional ways to build your credit.

  • Student credit cards: A student credit card is the same as a normal one, but banks design them specifically for students. They typically have a lower credit limit to allow students to practice responsible use and repayments. It might even be easier to increase your account limit down the road.
  • Secured credit cards: A secured credit card is one you back with a refundable security deposit. The deposit reduces the card issuer’s risk. In most cases, the cash deposit doubles as the card’s limit since it ensures you have the money to pay back what you charged.
  • Timely payments: Whether you choose a student or secured credit card, it is vital to make payments on time. It shows lenders you can pay back debt. Making total monthly payments may also help increase your credit score. Remember, when you use a credit card, the company is loaning you that money. Do not use it to buy things you otherwise could not afford.

Speak to the Experienced Student Loan Attorneys at McCarthy Law

While student loans may help build your credit, you must pay the monthly balance on time and in full. If you miss multiple payments and are 270 days late on federal student loans, they will default. Private loans can default even sooner. Not only will this lower your credit score, but it can put you in significant debt.

If you need assistance with your private student loans, contact McCarthy Law. Our attorneys can facilitate a resolution with your lenders to reduce the interest and principal amount owed. When successful, you only end up paying a fraction of what you owe while the lender forgives the rest. Learn more about our debt settlement program by calling (855) 976-5777 or complete our contact form to schedule a free consultation.

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